Global growth is cooling off. China has been slowing all year, UK growth is sluggish and growth has come off the boil in Europe. Only US growth remains strong, helped by President Donald Trump’s late cycle fiscal stimulus.

Unfortunately, headline inflation continues to track higher and this is likely to mean higher interest rates, particularly in the US. The upturn in headline inflation relates mainly to oil price strength on the back of declining inventories, supply disruption and heightened tensions in the Middle East. Unemployment rates are low all over the world but so far wage inflation is increasing only gradually.

Royal London’s Investment Clock model relates the performance of different investments to the global business cycle. We draw the cycle as a circle with growth and inflation the vertical and horizontal axes. We can ‘tell the time’ on the clock by plotting growth indicators against inflation indicators in two dimensions, taking economic trends into account as well as the directional scorecards. A ‘normal’ cycle starts at the bottom left and proceeds in a clockwise direction: reflation, recovery, overheat, and then stagflation.

The red dot in the chart above shows the current position, in the ‘overheat phase’ characterised by rising commodity prices and interest rates. The trail shows how the red dot has moved over the last 12 months. With growth cooling off and inflation rising, we expect the trail to continue moving clockwise, potentially dipping into mild stagflation over the summer.

The geopolitical backdrop also has a whiff of stagflation about it. A trade war would hurt growth and add to inflation pressures as industrial production shifted between geographies and companies raised prices to cover the cost of tariffs. Similar forces are also at play in the UK, where companies are preparing for worst case scenarios as the country prepares to leave the European Union that would increase costs and necessitate a reorganisation of just-in-time supply chains.

Trevor Greetham is Head of Multi Asset, Royal London Asset Management.