And here’s another view on the IMF’s latest pronouncements, from Capital Economics. The research company’s Michael Pearce said:
After spending the run-up to the UK’s EU referendum warning that Brexit would cause “severe regional and global damage”, the IMF all but admitted on Tuesday that it had been bluffing, forecasting that the impact would be largely benign after all.
The IMF downgraded its forecasts for global growth this year and next by just 0.1 percentage point, to 3.1% and 3.4% respectively. The biggest downward revision was of course to the UK, which the Fund now expects to grow by just 1.3% in 2017, almost a percentage point slower than its previous forecast. But even this is not as bad as the recession many commentators had warned of.
Meanwhile, the IMF nudged down its forecast for growth in the euro-zone next year by 0.2 percentage points, while the forecast for economies further afield was “little affected” by the Brexit vote. So much for the IMF’s claim that there would be “severe damage.”
Admittedly, the Fund did warn of a more disorderly outcome from Brexit, providing two alternative scenarios in which global growth stalls or slows further. However IMF Chief Economist, Maurice Obstfeld, acknowledged that these would require the impact on global trade to be “greater than [the IMF] thinks likely” while financial conditions would need to deteriorate far more than they had done so far...
Instead of Brexit, prospects for the world economy will be shaped far more by the outlook for China and the US. Recent data suggest that growth in both economies is holding up fairly well.
And on that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Updated
Deutsche Bank has had its credit rating cut from stable to negative by S&P Global Ratings. It said:
The outlook revision reflects our view that the unfavorable operating environment poses particular challenges to Deutsche Bank as it implements its 2016-2020 strategic plan. Although market conditions may recover somewhat from the weak first quarter of 2016, ultra-low interest rates and generally subdued client trading activity may persist for the foreseeable future. These pressures affect the entire sector but we believe they are particularly unhelpful for Deutsche Bank as it seeks to strengthen capital and maintain its franchise while fundamentally restructuring its business model and balance sheet...
The U.K.’s recent vote to leave the EU (Brexit) is a consideration in the outlook revision, but not a prominent one. We consider that Deutsche Bank should not be materially affected if the U.K. were to lose access to the EU financial services passporting arrangement, although it may need to relocate some activities from its large London branch. We assume Deutsche Bank’s trading revenues received a boost from Brexit-related market volatility but, in the longer term, we see Brexit as a factor that may prolong the current period of ultra-low global interest rates and depressed business volumes.
S&P cut Deutsche Bank outlook to negative, citing difficult environment. Rating affirmed at BBB+, 3 notches >junk. pic.twitter.com/YqVGZSNl4i
— Holger Zschaepitz (@Schuldensuehner) July 19, 2016
Updated
European markets turn in mixed performance
An uncertain day saw markets struggle for direction, but recover from their their worst levels. Global worries continued, with a further clampdown in Turkey in the wake of the recent coup attempt sending the lira tumbling, and concerns about the recent spate of terror attacks adding to the downbeat mood.
On the economic front, UK inflation came in higher than expected, but after an initial move higher for the pound, investors decided that the Bank of England was still likely to plump for a rate cut in August despite the new data.
German investor confidence fell sharply, hitting the Dax and other European markets, but strong US housing starts prompted further talk of a US rate hike and gave further support to the dollar. In turn the gains in the US currency put pressure on commodity prices including oil. The final scores showed:
- The FTSE 100 finished up virtually unchanged, up just 0.03% or 1.95 points at 6697.37
- Germany’s Dax dropped 0.81% to 9981.24
- France’s Cac closed down 0.63% at 4330.13
- Italy’s FTSE MIB fell 0.53% to 16,673.77
- Spain’s Ibex ended down 0.46% to 8485.2
- But Portugal’s PSI20 put on 0.35% to 4591.93
- And in Greece, the Athens market added 1.53% to 563.75
On Wall Street, the Dow Jones Industrial Average is currently down 20 points or 0.11%.
Tony Cross, market analyst at Trustnet Direct, said:
The FTSE-100 is continuing to toy with that 6,700 level but to be almost 4 weeks on from the shock of that Brexit vote and have the index seemingly in such good health – admittedly it’s flattered by a weak pound too – is certainly something worth noting.
The Turkish lira has tumbled as the government continues to take action in the wake of the failed coup. Jasper Lawler, market analyst at CMC Markets, said:
The Turkish lira has dropped sharply as the government continues to purge vast swathes of the establishment, risking a level of destabilisation that could seriously derail economic growth. The Turkey Education Ministry reportedly suspended 15,200 staff whilst 1,577 university deans have been asked to resign.
Turkish lira tanks after reports that government fired 15,000 teachers pic.twitter.com/6MhtefnN1X
— Georgi Kantchev (@georgikantchev) July 19, 2016
Here’s the UK Treasury response to the IMF world economic outlook:
View our spokesperson response to the @IMFNews World Economic Outlook update forecasts #WEO pic.twitter.com/K1efhCE6vk
— HM Treasury (@hmtreasury) July 19, 2016
Brexit is negative for the UK’s higher education sector and NHS Trusts and Foundation Trusts, according to ratings agency Fitch, due to the likely impact on staff and research funding. In a new report the agency says:
As we have stated previously, the full impact of Brexit, and any potential ratings impact, will depend on the exit terms negotiated, which remain uncertain. For the higher education sector, a favourable exit deal would limit the reduction in research grants from EU funds. Even so, restrictions on free movement could reduce projected student demand and increase pressure on universities’ revenues. The impact may be greater on English than on Scottish universities due to their different tuition fee arrangements for non-UK EU students, although we do not currently rate any Scottish universities.
Unfavourable exit terms for universities could be rating negative, primarily due to lower research grants from EU funds. This would hinder the recruitment and retention of academic talent and could create difficulties in collaborating with EU countries on international research development. Press reports indicate that some UK institutions and academics have been asked to withdraw from applications for joint EU-funded research projects by their EU partners. This would reduce their appeal to more lucrative international students.
UK Universities could also lose access to EU regional development, structural and cohesion funds to build new infrastructure. Modernization and expansion to attract overseas students is one reason sector debt has increased, reaching 26% of income in FY14.
Reductions in EU funding could be mitigated by savings on contributions for EU funding from the UK government. However, EU funding has significantly risen in the last five years to 15% or more of UK universities’ total revenue, while Britain’s own national research budget is below international averages and is facing existing pressure.
On the health service - a contentious issue during the referendum campaign of course - Fitch says:
For the NHS, staffing is a key Brexit-related issue: 55,000 of the NHS’s 1.3 million workforce and 80,000 of the 1.3 million workers in adult social care come from the EU. The NHS is struggling to recruit enough staff, with a shortage of about 50,000 staff. The ability of providers and social care services to recruit EU staff will be crucial for Trusts and FTs to maintain patient care income from NHS Commissioners.
The UK has been able to develop its medical research through collaboration across the EU in the same way that higher education has benefitted from access to European talent and funding. Between 2007 and 2013, the UK contributed GBP5.4bn to EU R&D, while it received GBP8.8bn from the EU for R&D and innovation. As it is unlikely that NHS Trusts and FTs would be able to cover the shortfall if EU funds were no longer available, funds spent on R&D would probably be significantly reduced.
The IMF is not forecasting a recession for the UK following Brexit although it is still a possibility. Earlier the European Commission issued its own forecasts, and suggested Britain’s economy could indeed fall into recession next year. Reuters reports:
Britain’s economy may slip into recession next year following the vote to quit the European Union, the European Commission estimated on Tuesday in its first assessment of the economic impact of Brexit.
Last week the commissioner for economic affairs, Pierre Moscovici, said the cumulative negative impact for British gross domestic product (GDP) would be between about 1 percent and 2.5 percent by 2017.
Estimates prepared by the EU executive staff and released on Tuesday give more precise figures than those provided by Moscovici and add a breakdown for this and next year.
Britain is expected to endure a “substantial slowdown” which will limit its economic growth to between 1.3 and 1.6 percent this year, lower than earlier estimates of a 1.8 percent growth.
The European Commission’s simulations project a much worse situation for next year, when Britain may experience a 0.3 percent contraction in the worst scenario.
In the most optimistic scenario Britain’s gross domestic product would grow 1.1 percent in 2017, still much less than the previously forecast 1.9 percent rise.
Back with the IMF and asked about Japan, Maury Obstfeld says there has been currency volatility but he would not characterise conditions as “disorderly.” Japanese growth and the 2% inflation target face challenges, he says, but he does not view currency intervention as a necessary or useful policy.
Wall Street edges lower at open
US markets are marginally lower in early trading despite oil price weakness and disappointing results overnight from Netflix.
But positive earnings statements from Goldman Sachs and Johnson & Johnson have helped limit the damage. So the Dow Jones Industrial Average is down just 2 points, helping other markets come off their worst levels.
Indeed, the FTSE 100 is now up on the day, albeit only by 13 points while Germany and France have recovered some ground although both are still down around 0.8%.
On Turkey, Maury Obstfeld says the IMF is monitoring the potential economic fallout of the failed coup attempt.
We have seen some market volatility but we would anticipate that things will settle down.
Turning to the G20, he says monetary policy has been bearing to much of the burden for growth and that more structural reforms are required.
Obstfeld says uncertainty surrounding Brexit is particularly acute, partly because it is unclear what trade agreements the UK will be able to secure outside the EU.
Naturally the greatest effects of Brexit will be felt in the UK.
The real effects of Brexit will play out over a number of months, giving an added layer of uncertainty.
He says the move by central banks to make additional liquidity available has helped to limit negative market reaction to the Brexit vote.
There are other risks to the global economy, Obstfeld says, including geopolitical risks and high long-term unemployment.
Policymakers should not accept low growth rates as the new normal. A slow growth environment will increase social tensions.
Obstfeld is saying that politicians in particular must make it their mission to dispel the idea that all ills stem from the globalisation of markets.
Maury Obstfeld, the IMF’s chief economist, is giving a press conference.
Here is our full story on the IMF’s downgrades:
US housing starts rise more than expected
The dollar has risen to a four-month high against a basket of currencies following figures that showed a bigger-than-expected rise in housing starts.
Housing starts at an annual rate of 1.19 million new homes in the year ending in June, up 4.8% according to the Commerce Department.
The dollar index, which tracks the US currency agains six major currencies, rose to 97.125, its highest level since mid March.
IMF slashes UK and world growth forecasts
Breaking: The International Monetary Fund has sharply lowered its forecasts for UK growth and says Britain’s decision to leave the EU has “thrown a spanner in the works”.
The Washington-based fund cut its forecast for UK growth in 2017 to 1.3% from an earlier forecast of 2.2% as the impact of the vote is felt.
UK growth this year is expected to be 1.7%, 0.2 points lower than the IMF’s previous forecast.
Global growth is forecast to rise by 3.1% this year and 3.4% in 2017, a 0.1 point cut for both years.
According to Maury Obstfeld, IMF chief economist:
Brexit has thrown a spanner in the works.
The report adds:
The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.
The IMF says the UK and Europe will be worst hit by the Brexit fallout, but the effects will be felt around the world.
Had it not been for Brexit, the IMF was prepared to leave its outlook for this year broadly unchanged as better-than-expected euro-area performance offset disappointing US first-quarter growth.
The IMF also had been prepared to raise its outlook for 2017 slightly, by 0.1 percentage point, on the back of improved performance in a few big emerging markets, in particular Brazil and Russia.
Truck makers fined £2.5bn for price collusion
The European Commission has fined Daimler, Volvo/Renault and two other truck makers a record €2.93bn (£2.5bn) for colluding on prices and passing the costs of emissions rules on to customers.
Full story here:
IG’s opening calls for Wall Street:
US Opening Calls:#DOW 18535 +0.02%#SPX 2162 -0.20%#NASDAQ 4604 -0.34%#IGOpeningCall
— IGSquawk (@IGSquawk) July 19, 2016
The IMF’s update on the world economic outlook is coming up at 2pm UK time.
Updated
UK house prices increased 1.1% between April and May, the ONS reported earlier, with the average price of a home rising to £211,000.
Over the year they rose by 16,000 or 8.1% - the same rate of annual growth as April. The biggest increases were in London and the south east.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says strong growth in house prices is “unlikely to persist” following the Brexit vote, predicting a 3% drop over the next year.
Indicators of demand at the beginning of the home purchase process weakened sharply during the second quarter and have plunged since referendum.
Meanwhile, mortgage rates are likely to edge up soon as banks price in higher default risk and pass on recent increases in their funding costs.
Prices in London and the South East, up 13.6% and 12.9% year-over-year respectively in May, look particularly vulnerable, because the outlook for employment in the financial services sector has darkened and banks will think twice about high loan-to-income lending.
As a result, we think that house prices are set to fall by about 3% from current levels over the next year.
Chancellor: first response to Brexit shock should come from BoE
The new chancellor Philip Hammond says any immediate response to the surprise Brexit vote should come from the Bank of England.
Taking his first Treasury questions as chancellor, Hammond said he would unveil fiscal plans to deal with a possible slowdown in the autumn.
The initial response to this kind of shock must be a monetary response delivered by the Bank of England.
And the governor, announcing that interest rates were not to be lowered last week, did make it clear that the Bank is developing a monetary package that it will announce in due course.
The Bank of England is still expected to cut interest rates in August, despite the stronger-than-expected rise in inflation in June.
The Bank’s Monetary Policy Committee surprised the City last week when it left rates on hold at 0.5% and announced no other measures to stimulate the economy in the post referendum world.
Governor Mark Carney has been explicit that he expects loosening of policy over the summer, and economists have shifted their expectation to a move in August.
Jennifer McKeown, senior European economist at Capital Economics, says the weak ZEW survey in Germany signals there is more concern about the fallout from Brexit than markets suggest.
July’s German ZEW Survey, which was conducted over the past two weeks, suggests that investors are more worried about the effects of Brexit on the German economy than the financial market response has so far implied.
The Economic Sentiment Indicator [on the ZEW] is now at its lowest level since November 2012 when Germany was in recession. And the fact that it is below zero means that most investors expect economic conditions to deteriorate over the next six months.
On the basis of its past loose relationship with GDP growth, the ESI looks consistent with falls in GDP.
Britain should be prepared for higher inflation in the coming months following its vote to leave the EU, economists are warning.
The Bank of England’s target for inflation is 2%, so we’re still a way off that but perhaps not for much longer given the fall in the pound since the Brexit vote should increase import prices.
Ben Brettell at Hargreaves Lansdown describes the rise in inflation to 0.5% in June as “the calm before the storm”.
Sterling’s weakness means higher import prices, and this is expected to feed through to significantly higher inflation figures in the coming months. Forecasts suggest it could reach 3-4%.
However, this will be a temporary factor: assuming sterling remains weak, the effect will fall out of the year-on-year calculation in the second half of next year.
Brettell says that as a result, Bank of England policymakers are likely to discount a short-term spike in inflation.
Underlying inflationary pressure is hard to see, with Brexit-related economic uncertainty likely to dampen both consumer spending and wage growth in the short term.
As such the Bank of England is almost certain to ignore what should be a temporary spike in inflation when it sets monetary policy.
The weak German ZEW survey will add to investor jitters. Market falls have accelerated since early trading:
- FTSE 100: -0.5% at 6,662
- FTSE 250: -0.4% at 16,803
- Euro Stoxx 600: -0.9% at 336
- Gemany’s DAX: -1.3% at 9,936
- French CAC: -1.1% at 4,312
- Italy’s FTSE MIB: -1.8% at 16,456
- Spanish IBEX: -0.7% at 8,466
Updated
Andrew Bailey has told the public meeting of the Financial Conduct Authority that access to the single market post-Brexit is important.
Speaking in his new role as chief executive of the regulator, Bailey told the members of the public assembled in the Queen Elizabeth Conference Centre in London that the regulator was also keen for trade arrangements with other countries too.
At the same time, he told the meeting that the current rules had to remain in place - including the bonus cap - and that Brexit did not “lead to a bonfire of regulation”.
He said: “I welcome the chancellor’s statement that the UK will seek access to the single market through the coming negotiations. We will support the government’s work to put in place new arrangements, and I would include in that, alongside access to the single market, seeking to have in place agreements with other countries.
From an FCA perspective, there is, for instance, no doubt that our objective of ensuring healthy competition in UK financial markets is supported by cross-border trade in these financial services”.
German confidence plunges following Brexit vote
Confidence among German investors and analysts fell sharply in July as a result of the uncertainty created by Britain’s decision to leave the EU.
The result of the 23 June referendum sent shockwaves across Europe and hit confidence in the region’s largest economy more than expected.
Economic sentiment on Germany’s closely watched ZEW index fell to -6.8 in July, from 19.2 in June. Economists polled by Reuters were predicting a smaller fall to 9.
#Brexit vote hits investor confidence in #Germany: ZEW Index lowest since Nov'12. Flash #PMI results out on Friday pic.twitter.com/FaDzhOSOcC
— Markit Economics (@MarkitEconomics) July 19, 2016
The current conditions measure of the ZEW also fell more than expected, to 49.8 in July from 54.5 in May.
Florian Hense, economist at German bank Berenberg, said the Brexit vote had taken the ZEW back down to euro crisis levels.
The data comes two days before the ECB’s governing council makes its latest policy decision.
Hense:
While monthly data are volatile, this reading will be valuable for policymakers in Frankfurt. It is the first reading for the eurozone’s economy since June 23.
The first reading of the economy is somewhat in contrast to market developments. When the ECB’s governing council convenes on Thursday for its monetary policy meeting, they will acknowledge that market moves so far have been relatively orderly and sovereign bond yields, particularly in the Eurozone periphery, signal limited contagion risk.
But today’s soft data will be some cause for concern, supporting our view that Draghi’s press conference will take a dovish tone.
Here is our full story on this morning’s inflation data, from the Guardian’s economics editor, Larry Elliott:
Fans of Pokemon Go get carried away in Australia:
Don't get caught out playing #PokemonGO Two people have been injured already. https://t.co/JwzloBe8sn pic.twitter.com/BgmIVFrAtz
— Ambulance Victoria (@AmbulanceVic) July 19, 2016
Nintendo's value doubles on Pokemon Go craze
In corporate news, the market value of Nintendo has more than doubled since the release of its Pokemon Go game earlier this month.
The Japanese company now has a 4.5tn yen (£32bn) market capitalisation, with investors rushing to buy the shares following the huge success of the game.
The ONS says Euro 2016 was probably behind the 10.9% spike in air fares in June.
Phil Gooding, ONS statistician:
The rising cost of European air flights, possibly boosted by the Euro football championships, was the biggest reason for this month’s increase in inflation.
The growing cost of oil, feeding through to petrol prices, also helped nudge up CPI.
Today’s figures were collected before the EU referendum, so recent falls in the value of the pound will have had no impact on them.
Air fares and petrol prices fuel higher inflation
The rise in annual inflation to 0.5% in June was driven largely by higher air fares and petrol prices, as well as games and toys.
The last time inflation was higher than 0.5% was November 2014, when it was 1%.
A 10.9% increase in air fares was the biggest May to June rise on record. Prices increased on European routes in particular.
Petrol and diesel prices rose by 2.3p and 2.6pm per litre.
Prices in the recreation and culture category increased by 0.6%, with toys and games, particularly computer games, driving the rise.
Updated
Inflation rises more than expected in June
Breaking: UK annual inflation increased to 0.5% in June from 0.3% in May.
That was a bigger than expected rise, with economists predicting 0.4%.
Government borrowing will be £20bn higher this year than the £55bn forecast in the March budget, according to a forecast by RBC Capital Markets.
Sam Hill, economist at RBC, said comments made by Philip Hammond, the new chancellor, suggested he was in favour of fiscal loosening to support investment.
The new Chancellor’s early comments point towards fiscal policy loosening focused towards investment.
This would fit well with a return to the more conventional fiscal rule adopted in the early days of the Cameron/Osborne era.
Pound falls against dollar and euro
The pound is down this morning before the latest UK inflation data at 9.30am.
It has dipped below $1.32, falling 0.6% against the dollar to $1.3175.
Sterling is also down 0.4% against the euro, at €1.1914.
Any impact of comments made by Martin Weale - a member of the Bank of England’s Monetary Policy Committee – on Monday appear to have faded.
Weale suggested a cut in UK interest rates in August was not a foregone conclusion.
One of nine MPC members, Weale’s voting record suggests he is traditionally more in favour of raising rates than the majority of other members.
European markets open lower
Markets have opened down this morning, as geopolitical tensions create uncertainty.
The FTSE 100 is off 20 points or 0.3% at 6,677, while the FTSE 250 is down 0.2% at 16,836.
All major European indices are down, apart from the Spanish IBEX which is roughly flat.
Updated
Also on the agenda...
UK inflation data is expected to show a pick up in the annual rate in June.
Economists polled by Reuters are expecting to see the headline rate increase to 0.4% from 0.3% in May, partly because of an increase in petrol prices between the two months.
The data was collected by the Office for National Statistics before the 23 June EU referendum. As a result, the fall in the value of the pound since the vote will not have fed through to the official inflation data as yet.
As Victoria Clarke, economist at Investec, explains:
In light of the UK’s vote to leave the EU all pre-referendum releases including this one look particularly historic and the question now is over the extent to which the slump in the pound supports a faster recovery of inflation to target, despite some likely further drag from a weaker domestic demand picture.
Our central view is that inflation will head north quite rapidly for a time, but that this sterling boost will be a temporary phenomenon.
The ONS will also publish its house price index for May at 9.30am.
In Germany, the closely watched ZEW survey for July will provide insight into whether the Brexit vote has dampened confidence in Europe’s largest economy.
Later in the US, housing starts data for June will be an indicator of how the property market is performing and its wider implications for the economy.
IMF to cut global growth forecasts
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
All eyes will be on the IMF today as it provides its latest update on the global economy.
The Washington-based Fund, headed by Christine Lagarde, is expected to downgrade its previous prediction that the global economy will grow by 3.5% in 2017.
It is also expected to cut its 2017 UK growth forecast from its previous prediction of 2.2%.
Lagarde was a vocal opponent of Brexit in the run-up to the 23 June referendum, warning the UK of a possible housing and stock market crash.
It is likely that the IMF will say in today’s report the vote to leave the EU has increased uncertainty for the global outlook.
The update will be published at 2pm UK time.
Updated
