The International Monetary Fund (IMF) Committee met in Washington yesterday to give their latest overview and forecasts for the global economy. The signs were never good prior to the gathering but what they had to say was more concerning than most had expected. In fact, they went as far as saying the global economy had entered a “dangerous new phase” of sharply lower growth. Furthermore, they went on to say that they believe global growth will shrink to 4 percent in 2012, from 5 percent last year. These latest comments point out the elephant that has been lingering in the room for quite some time and the US are likely to be the nation worst hit.
Pound Sterling – UK Markets
The IMF has cut its growth forecasts for the UK. GDP is expected to grow 1.1 percent in 2011, down from the 1.5 percent forecast in the IMF’s previous report. Furthermore, the growth forecast for 2012 has been cut from 2.3 percent to 1.6 percent. Despite the worrying nature of this news, I began this year stating that very few of the developed nations will perform well this year and that it would come down to who has the ability to crawl into 2012 first. It appears that the UK may just do this with the IMF stating that the US economy would remain weak for years to come and the eurozone will struggle through a debt crisis that threatens to cripple the continents economy.
On the back of this, the government has come out in force defending spending cuts and stating that they will do more, along with the Bank of England to encourage growth. At present, ministers are discussing how to inject up to £5 billion into the economy. Whilst sterling has failed to make any significant improvements against both the dollar and euro, it is worth noting our rapid appreciation versus high risk currencies such as the South African Rand.
US Dollar – US Markets
With the IMF portraying stormy times ahead for the US economy it is worth noting that growth forecasts for 2011 now stand at 1.5 percent. However, they are likely to suffer further blows in the short term that stem from a weak housing market, high unemployment levels and worsening financial conditions. The IMF has warned that these issues could drag both the US and Eurozone back into recession. The only way forward is for the US to devise a plan to “put public debt on a sustainable path and implement policies to sustain a recovery”.
On the back of this, rather than come out all guns blazing, Federal Reserve Chairman Ben Bernanke has very few tools available to him to heal the bleeding economy. The US Dollar is perhaps the only saving grace in what has been a miserable week of data. The greenback continues to outperform most of its major counterparts despite falling back against the Japanese Yen.
Euro – European Markets
Without sounding like a broken record I find it slightly bizarre that the European Union have the nerve to keep suggesting that talks to avert a financial meltdown in Greece have made “good progress”. If I’m not mistaken isn’t this what has been said for the last two days? Mind you, at least I will not have to repeat myself tomorrow as well, as debt inspectors will now defer proceedings in Athens to the start of next week. So again, without pointing out the obvious, I don’t believe we have been able to report on any firm actions that have been discussed. It appears as though we will have to be patient once more and see if next week holds anything more substantial.
The markets continue to go against the grain of popular belief as the euro clings on to gains made over recent days against sterling. The US Dollar on the other hand is maintaining gains it made at the back end of last week against the single currency despite the IMF’s most recent dire assessment of the world’s largest economy. During the ongoing financial crisis, Germany and France continue to hold the fort as the IMF predicted growth of 2.7 and 1.7 percent respectively for 2011.
Other Currencies – Highlights
The recent surge by the Japanese Yen has not been welcomed by a nation that relies on its export activity. Exports were raised less than expected as slowing growth abroad and an appreciating Yen halted the Japanese economy. Whilst ministers were expecting a rise of 8 percent in shipments abroad, national statistics revealed that a minor increase of 2.8 percent was seen in August. Due to this, the nation’s trade deficit will widen more than expected.
The US Dollar Rallies on Upbeat Data and Hawkish Fed Stance
Soft CPI Data, Lack of Progress in Brexit Talks Hurt Pound Sterling
Strong Labour Market Data from UK Lift Pound Sterling