Saturday 26 May 2018

Daily Market Update: Global growth forecasts cut as IMF warns of stagnation risk

EU and UK flags fly above the EU Commission offices in Westminster. Photo: PA
EU and UK flags fly above the EU Commission offices in Westminster. Photo: PA

Rachel Barden

Sterling strengthened yesterday after data showed UK inflation rose at a faster than expected pace in March.

Consumer prices were up 0.5%, after a 0.3% figure in February, coming in above the 0.4% increase that markets had predicted. UK Inflation has been gradually increasing after falling below zero last year, but is still well below the Bank of England’s 2% target. EURGBP has fallen below 0.80 and rose 0.5% against the dollar after the release to 1.4312.

The International Monetary Fund (IMF) cut its global growth forecast for 2016 for the fourth time in the last 12 months, from 3.4% in January to 3.2%, pointing to long term weakness in the major economies, low oil prices and China’s slowdown. It warned of widespread stagnation risk and stated that the global economy could be more vulnerable to shocks such as currency depreciations or geopolitical conflicts as a result of continued weaker growth. Even the U.S. who has been one of the better performers in the global economy has had its growth forecast cut from 2.6% to 2.4%, with the IMF anticipating a continued drag on exports from a stronger dollar. China’s growth forecast was increased marginally to 6.5% this year, and 6.2% for 2017 but the IMF said it still expects growth to weaken as it moves to a more consumer-driven economy. The Fund called on global policymakers attending the IMF and World Bank meetings, being held in Washington this week, to take coordinated actions to boost demand with structural economic reforms, fiscal stimulus where possible and accommodative monetary policy. "Lower growth means less room for error," IMF chief economist Maurice Obstfeld said in a statement. "Persistent slow growth has scarring effects that...reduce potential output and with it, demand and investment."

China's trade data released overnight showed exports returning to growth for the first time since February 2015 and far exceeded market expectations. These upbeat releases provided hope that the world’s second largest economy is stabilising and buoyed global stock markets as demand increased for riskier assets including equities and commodities.

The Saudi Arabian oil minister Ali al-Naimi appeared to rule out a reduction in crude oil production last night ahead of this Saturday’s meeting between oil producers in Doha. This appears to directly contradict previous reports that an agreement had been reached to cap output at the April 17th meeting by Russia and Saudi Arabia. Oil futures fell on the back of this report, with U.S. crude giving back approximately 50% of the 4.3% gains it made the day before after data showed improving crude demand in China, whose imports were up 13.4% in Q1 compared to the same period last year.

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