22 May 2024: The IMF predicts 0.7% GDP this year


  • The IMF predicts a soft landing
  • A Fed Governor gives an honest appraisal of the economy
  • The Eurozone economy is improving but slowly
GBP – Market Commentary

Longer-term prospects appear to still be subdued

The UK’s economic prospects continue to improve. Yesterday, the IMF upgraded its prediction for full-year growth from 0.5% to 0.7%, although it left its prediction for next year unchanged at 1.25%.

However, the Fund stressed that urgent structural reforms are needed to improve living standards ahead of the General Election later in the year. Although the IMF is not usually prone to recommend Governments on what reforms it suggests should be made, it did caution against any pre-election tax cuts, while implying that further revenue could be gleaned from the transportation sector via carbon taxes.

The increase in the level of long-term sickness in the workforce is causing productivity to be below optimum.

As inflation continues to cool, the IMF believes that the Bank of England will be able to cut the base rate up to three times this year, with each cut being twenty-five basis points.

The latest inflation data will be published later this morning. Although Andrew Bailey told reporters that he is unaware of the numbers, he is confident that the headline rate has “seen a significant fall”.

Economists have suggested that CPI could have fallen to 2.1% in April from March’s rate of 3.2%.

Given Bailey’s recent guidance that the MPC need not wait for it to reach the Bank’s 2% target for cuts to begin, the result will doubtless encourage investors to expect a cut at the next meeting of the MPC, which takes place on June 20th.

The result of Former Fed Chair, Ben Bernanke’s review of the Bank’s forecasting methodology has given it far greater insights into its forward-looking view of inflation persistence, and this has allowed for more accuracy in projecting future monetary policy action.

The IMF report also said that difficult choices will need to be made to stabilize public financing, which will bring some pressure on critical investment and public services.

This is a warning to the Labour Party and the electorate that if the Opposition were to win the election, their policies would need to reflect the state of the public purse and not their enthusiasm for a series of quick fixes which may include a significant increase in public debt.

The market has reacted positively to the IMF report, it rose to a high of 1.2707 versus the dollar and closed at 1.2709.

USD – Market Commentary

The U.S. and China are diverging

President Biden’s recent agreement to increase tariffs on imports of Chinese manufactured goods has followed in the footsteps of restrictions introduced during the Trump Presidency, although the latest increase comes without the bluster and rhetoric that went with any major Trump foreign policy initiatives.

Nonetheless, it seems that the U.S. and China continue to diverge in their appreciation of globalization. Using such a heavy-handed approach to trade by introducing restrictive tariffs rather than agreeing to a series of quota agreements may harm the relationship between the two nations in the long term.

This new-found protectionist stance will limit consumer choice and push up prices. The voracious appetite of the U.S. consumer will not be sated and may hinder growth overall.

While the latest tariffs only affect around eighteen billion dollars worth of trade, it is the sectors that will be impacted that will draw the biggest response from Beijing.

Chinese imports, including electric cars, solar panels, steel and aluminium, are the areas where the U.S. feels that it must protect itself. The EV sector has seen China make great strides recently, and its production dwarfs current U.S. levels.

China needs to be seen to be making greater efforts to balance the supply of consumer goods, which often tend to be “energy heavy” to produce products that enhance its green credentials, like solar panels.

Although the U.S. economy is growing, albeit at a slower-than-optimum rate recently, job creation continues at a rapid pace, and the majority of blue-collar workers are dissatisfied with the progress that is being made to provide it with a better standard of living.

China is often portrayed as the culprit in providing low-cost consumer products, attracting workers ire in the Trump era.

President Biden has been quiet on the subject of trade recently but may be beginning to realize that once Trump has freed himself from the trial he is undergoing at the moment (assuming that he does), he is likely to use China as a major factor in the decline in living standards.

Atlanta Fed President, Raphael Bostic has consistently been the most hawkish member of the FOMC according to his speeches recently. Yesterday, he spoke of the achievement of the Fed’s 2% inflation target as its number one priority.

He expects the headline rate of inflation to fall to 2% “eventually” and lead to a rate cut in the fourth quarter of this year. However, he believes that the fight against inflation may well continue into the first half of 2025.

The dollar index is still sluggish, although it appears to have created a short-term bottom around the 104.20 level. Yesterday it rallied, albeit without any great conviction, to a high of 104.76 and closed at 104.65.

EUR – Market Commentary

A cut after June is “not a given”

The President of the Bundesbank, Joachim Nagel, conceded yesterday that a twenty-five-basis point interest rate cut is a done deal at the meeting of the Governing Council of the ECB, scheduled to take place on June 6th.

Although the cut has been a long time coming and even now there are several dissenters, the Hawks have seemingly decided to concede a little ground while trying to ensure that the Central Bank does not get ahead of itself and agree to a series of cuts that the available data doesn’t condone.

Nagel has joined with Executive Board members Isabel Schnabel, as well as Governing Council members Pierre Wunsch from Belgium, The Dutch Central Bank Governor, Klaas Knot and Latvian, Martins Kazaks in calling for restraint when discussing any further cuts until the data shows a continuation of the fall in inflation and the effect of the first cut.

There is no doubt that Robert Holzmann, Austria’s Central Bank Governor is a “fully paid-up member” of this “club”.

“If rates are lowered for the first time in June, that does not mean we will cut rates further in subsequent Governing Council meetings,” Nagel said during a question-and-answer session with several European newspapers. “We are not on autopilot.”

Nagel believes that headline inflation will fluctuate around the 2.5% level for a “few months”. Nagel and the rest of the hawks are concerned that this could well mark the bottom of the current cycle if a series of rate cuts are agreed, even as energy prices continue to fall both structurally and seasonally.

The most pressing concern of ECB President Christine Lagarde since the start of the year has been the issue of a wage/price spiral developing. Nagel was less concerned about this happening, commenting that progress has been made and there is no sign of a self-propelling spiral beginning given the diversity that exists across the entire Eurozone.

He is concerned, however, about the possibility of the occasional month when inflation “ticks up” due to “one-off” factors, and he wants to ensure that this is not “fanned” by unwarranted rate cuts.

The market has accepted that a rate cut is almost certain to happen early next month. While it appears to have taken this in its stride, the euro does not seem to have priced this in.

The single currency fell to a low of 1.0843 yesterday and closed at 1.0854. It appears that for now, an approach to the 1.0825/30 level is attracting buyers, while sell orders begin around 1.0870/75.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.