IMF: UK faces fairly subdued growth
Q: Might the IMF need to revise its UK growth forecasts up, if interest rates don’t hit 6% as you assumed when drawing up today’s forecasts, our economics editor Larry Elliott asks.
The IMF’s Pierre-Olivier Gourinchas replies that the Fund expects a fairly sharp slowdown in 2023, with UK growth falling from 4.1% last year to just 0.5% in 2023 (a small upward revision from the 0.4% forecast before).
“Fairly weak’” growth is then expected in 2024, at just 0.6% (down from 1%) the worst in the G7. (as flagged earlier).
UK inflation is seen at fairly elevated levels, averaging 7.7% this year.
Gourinchas warns that the Bank of England must keep interest rates (currently 5.25%) high into 2024.
The general perspective on the UK is we have fairly subdued growth, we have falling momentum, a labour market that is cooling, but inflation remains quite persistent.
And that is going to require monetary policy to remain tight for a little while longer, into next year.
Key events
Back in Marrakech, the International Monetary Fund has warned that global growth would be hurt by rising oil prices.
IMF chief economist Pierre Gourinchas told reporters that the Fund has noted that oil has increased by around 4% in the last few days, following the conflict between Hamas and Israel.
We see often spikes in energy prices when there is geopolitical instability in the region, Gourinchas points out.
He reiteratess that it is “a little bit too early” to say how much of the move will be sustained, and to assess the wider economic impact of the war.
But, he says, the Fund’s research shows that a 10% increase in oil prices will knock 0.15 percentage points off global economic output in the following year, and increase global inflation by 0.4 percentage points.
The IMF has also cut its forecast for Russia’s growth next year.
Russia’s GDP is forecast to rise by 1.1% in 2024, down from 1.3% forecast in July.
But Russia’s economy is expected to grow by 2.2% this year (up from 1.5% forecast before), after a 2.1% contraction in 2022.
The IMF has upgraded its forecast for Ukraine this year, to 2% growth rather than a 3% contraction.
This is due to:
“stronger-than-expected domestic demand growth, with firms and households adapting to the war in that country amid sharply declining inflation and stable foreign exchange markets”
IMF: UK faces fairly subdued growth
Q: Might the IMF need to revise its UK growth forecasts up, if interest rates don’t hit 6% as you assumed when drawing up today’s forecasts, our economics editor Larry Elliott asks.
The IMF’s Pierre-Olivier Gourinchas replies that the Fund expects a fairly sharp slowdown in 2023, with UK growth falling from 4.1% last year to just 0.5% in 2023 (a small upward revision from the 0.4% forecast before).
“Fairly weak’” growth is then expected in 2024, at just 0.6% (down from 1%) the worst in the G7. (as flagged earlier).
UK inflation is seen at fairly elevated levels, averaging 7.7% this year.
Gourinchas warns that the Bank of England must keep interest rates (currently 5.25%) high into 2024.
The general perspective on the UK is we have fairly subdued growth, we have falling momentum, a labour market that is cooling, but inflation remains quite persistent.
And that is going to require monetary policy to remain tight for a little while longer, into next year.
IMF hopes for rapid de-escalation in Israel-Hamas conflict
Q: How serious a risk to the global economy is the war between Israel and Hamas, my colleague Larry Elliott asks the IMF.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, says the Fund is very saddened by the loss of life we are seeing.
The IMF is monitoring the situation very carefully in terms of economic impact it could have on the region, and beyond, he says.
Gourinchas adds that it is “too early to really assesss what the impact will be”, and points out that the Fund’s latest forecasts were drawn up before the conflict began last weekend.
Gourinchas concludes:
Of course, we all hope for a rapid de-escalation in the conflict and an end to the violence.
The IMF are holding a briefing on their new economic forecasts, in Marrakech, Morocco.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, is explaining that the Fund has downgraded its growth forecast for the euro area this year to 0.7%, which he calls “a pretty sharp slowdown”.
A modest rebound is forecast in 2024, to 1.2%.
Looking “under the hood”, the IMF sees some continued weakness in Germany, while other countries such as Spain are growing more robustly (+1.7%).
Countries with large manufacturing bases are suffering from high energy costs, Gourinchas adds, while service companies are also seeing a slowdown.
This means European growth will probably enter a “soft patch” for the next year, Gourinchas concludes.
Here are the IMF’s latest growth forecasts for next year:
IMF Growth Forecast: 2024
USA🇺🇸: 1.5%
Germany🇩🇪: 0.9%
France🇫🇷: 1.3%
Italy🇮🇹: 0.7%
Spain🇪🇸: 1.7%
Japan🇯🇵: 1.0%
Canada🇨🇦: 1.6%
China🇨🇳: 4.2%
India🇮🇳: 6.3%
Russia🇷🇺: 1.1%
Brazil🇧🇷: 1.5%
Mexico🇲🇽: 2.1%
Morocco🇲🇦: 3.6%
KSA🇸🇦: 4.0%
Nigeria🇳🇬: 3.1%
RSA🇿🇦: 1.8%https://t.co/pzLIvHg5Ln pic.twitter.com/gCpVdsy8g5— IMF (@IMFNews) October 10, 2023
The IMF says its economic projections are increasingly consistent with a “soft landing” scenario, in which inflation falls without a major downturn in activity.
This is especially true in the United States, the Fund’s Pierre-Olivier Gourinchas says, where unemployment is forecast to only rise to 3.9% by 2025, from 3.6%.
IMF: Global economy is limping, not sprinting
The world economy has shown ‘remarkable’ resilience, given the impact of Covid-19, the Ukraine war, and high inflation, the IMF says in its latesst World Economic Outlook.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, says:
The global economy continues to recover slowly from the blows of the pandemic, Russia’s invasion of Ukraine, and the cost-of-living crisis. In retrospect, the resilience has been remarkable.
Despite the disruption in energy and food markets caused by the war, and the unprecedented tightening of global monetary conditions to combat decades-high inflation, the global economy has slowed, but not stalled. Yet growth remains slow and uneven, with growing global divergences. The global economy is limping along, not sprinting.
IMF: UK to be slowest-growing G7 next year
Newsflash: The UK is set to be the slowest growing member of the G7 next year, according to (somewhat outdated) forecasts from the International Monetary Fund.
The IMF’s latest World Economic Outlook (WEO predicts that the UK will grow by 0.6% in 2024, down from a previous forecast of 1% growth.
That would leave Britain lagging the US (forecast to grow by 1.5%), Germany (+0.9%), France (+1.3%), Italy (+0.75), Japan (+1%) or Canada (1.6%).
UK GDP is expected to grow by 0.5% this year, a sharp slowdown on the 4.1% growth seen in 2022.
The IMF says:
The decline in [UK] growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices.
However… that 2024 forecast is based on an interest rate forecast that the IMF says is out of date.
Our economics editor Larry Elliott explains:
When the WEO was being prepared last month, the IMF’s assumption was that the Bank of England’s ceiling for borrowing costs would be 6%.
After Threadneedle Street’s decision to pause raising rates at the September meeting of its monetary policy committee, the IMF now believes the peak will be 5.25% or 5.5%.
#BREAKING Global growth is forecast to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024, a 0.1 percentage point downgrade for 2024 from IMF’s July projections, according to the World Economic Outlook released by the @IMFNews on Tuesday.
— CGTN Global Business (@CGTNGlobalBiz) October 10, 2023
The London stock market has opened sharply higher, as investors regain their appetite for shares as bond yields fall back.
The FTSE 100 index has jumped by 82 points, or 1.1%, to 7,574 points, the highest in a week.
In a reverse of yesterday, oil companies are lagging the market, with Shell down 0.7% and BP off 0.4%.
The FTSE 250 index of medium-sized companies has jumped by 1.5%.
Kantar’s latest grocery healthcheck shows that German discounters Aldi and Lidl reported strong sales growth of 14.9% and 15.2% respectively while Tesco and Sainsbury’s both enjoyed sales growth above 9%.
Victoria Scholar, head of investment at interactive investor, explains:
Facing an uphill battle against a declining propensity to spend among consumers, the supermarkets have been desperately cutting their prices this year to attract customers through their doors. This has helped to reduce the overall level of supermarket price inflation with some staple foods now falling in price.
The cheaper German discounters have benefitted from shoppers’ increased price sensitivity. Many are desperately seeking out bargains and are trading down to cheaper ranges away from more expensive, branded items.
Nonetheless, some food prices are still rising according to Kantar such as eggs and frozen potato products.”
The unusually warm September weather has boosted sales volumes of ice cream by 27%, Kantar reports.
Late-season barbecue action lifted burger sales by 19%, while dips were up 1%.
Sun cream sales more than doubled compared to August, which was a rather damp month.
Kantar’s Tom Steel adds:
Christmas seemed further away for many with fewer people buying Christmas puddings and seasonal biscuits as volume sales were down by 14% and 29% versus this time last year.
UK grocery inflation falls again as prices of some staple items drop
Newsflash: UK grocery inflation has dropped back to its lowest level in over a year, as price pressures have eased.
Prices across grocers were 11% higher than a year ago in September, down from 12.2% in August, data provider Kantar reports.
That’s the lowest level since July 2022, and the seventh monthly decline in a row, since grocery inflation peaked at a record 17.5% in March.
However, it still means food prices are rising faster than average wages (+8.5%), and by over five times the Bank of England’s 2% target for overall consumer price inflation.
Kantar reports that the prices of some staple foods are now dropping, for the first time since last year, with the average price of a pack of butter now 16p less than a year ago.
Supermarkets are also pitching more offers to customers, pulling down prices.
Tom Steel, Kantar’s strategic insight director, says:
Supermarkets are looking at all the different ways they can deliver value at the tills and while the emphasis for some time has been on everyday low prices, the retailers are starting to get the deal stickers out again.
Spending on promotions made up over a quarter of all sales in the latest 12-week period at 26.5%, the highest level since June 2022.
US Treasury bonds see best day since March
The dash for safe-haven assets is helping to pushing down the interest rate on US government bonds today.
The yield on US Treasuries have tumbled in Asia-Pacific trading, in the biggest one-day move since March, as bond prices jumped.
🚨 🚨 BREAKING: Treasuries are having their best day since March, with 10-year yields down as much as 18 bps after dovish comments from Fed officials and as conflict in the Middle East fueled a flight to safety. Traders are betting the Fed’s most aggressive tightening cycle since… pic.twitter.com/FbII3HkuB4
— Algomasters.com (@BluePhoenixFin) October 10, 2023
This bond rally suggests that bond investors may be hopeful that US interest rates could be at or near their peak. Fears of further increases triggered a rout in bond prices last week, sending yields to 16-year highs.
Yesterday, Dallas Fed president Lorie Logan said on Monday that the recent rise in long-term U.S. Treasury yields, and tighter financial conditions more generally, could mean less need for the Federal Reserve to raise interest rates further.
Treasuries sell-off…Fed say market’s done their job for them…Treasuries rally…Fed’s job no longer done…like the circle of life…
— Michael Brown (@MrMBrown) October 10, 2023
Yesterday, European government bonds recovered some ground, after the recent selloff which attracted comparisons with the run-up to the stock market crash of 1987.
Britons cut back on eating out and takeaways to save for festive splurge
Mark Sweney
Cash-strapped Britons are cutting back on eating out and reining in on buying takeaways to save up for the expensive Christmas season splurge.
The amount spent on going out to restaurants plunged 10.8% month on month in September, a significant slowdown compared with the decline of 5.8% registered in August, according to the latest UK consumer card spending figures from Barclays.
The growth in the amount the public spent on takeaways has also slowed dramatically, from 9.2% in August to 6.5% last month, as 44% of Britons surveyed said they are starting to reduce discretionary spending to pay for Christmas.
Deutsche Bank warns of 1970s-style stagflation risks
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Could the world be heading for a repeat of the stagflation of the 1970s?
50 years ago, inflation remained stickily over target, industrial action gripped countries such as the UK, energy prices spiked, and there was war in the Middle East.
And today, analysts at Deutsche Bank see certain comparisons. In a research note out this week, Deutsche’s Henry Allen and Cassidy Ainsworth-Grace there are a “striking number of parallels” between the 1970s and our own time:
They write:
Inflation remains above target across the major economies; we have witnessed severe spikes in energy prices over recent years; and there’s been growing industrial unrest.
Over the weekend, the attacks on Israel showed how geopolitical risk can return unexpectedly. And we are also seeing an El Niño event this year, which echoes a similar event in the early 1970s that put upward pressure on food prices.
The biggest single cause of the stagflation of the 70s was the oil shock, when the OAPEC group imposed an oil embargo during the Yom Kippur War.
It sent much of the Western world into recession, and it took many years before price stability returned, Deutsche point out.
Although oil jumped yesterday, after the Israel-Hamas war began, crude prices are still below the $100/barrel mark.
Recent interest rate increases, and the easing of supply chain bottlenecks, could also cool inflation.
But, Allen and Ainsworth-Grace say, there are “very strong” reasons for caution, and to avoid complacency.
Inflation is still above target in every G7 country, and the 1970s showed how unexpected shocks could rapidly send inflation higher once again. History also suggests that the last phase of returning inflation to target is the hardest.
And given inflation has already been above target for the last two years, a fresh inflationary spike could well lead expectations to become unanchored.
Also coming up today
We’ll hear the International Monetary Fund’s view on the global economy this morning, when it releases the latest World Economic Outlook.
European stock markets are set to open higher, with the FTSE 100 forecast to rise by around 50 points or 0.75% to 7541 points.
And there’s a recovery in the bond market, with the yield on US Treasuries falling sharply in early trading.
The agenda
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8am BST: Kantar’s grocery inflation report
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9am BST: IMF will release the World Economic Outlook (WEO)
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9.30am BST: ONS report: The role of labour costs and profits in UK inflation
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11am BST: NFIB index of US business optimism
