23 October 2024: The upgrade to the UK economy is the largest in the G7

Rachel Reeves took time off from considering her first Budget to welcome the news that the IMF has upgraded its prediction for UK growth in 2024.

Annualized GDP is expected to grow by 1.1% this year, up from the previous forecast of 0.7% published in July. This would place the UK third after the U.S. and Canada but represents the largest revision of any G7 economy.

Growth will outpace that seen in both Germany and Japan this year. The IMF also upgraded its forecast for global growth this year to 3.2%.

The forecast for growth in 2025 was left unchanged at 1.5%.

IMF Chief Economist Pierre-Olivier Gourinchas commented, “Monetary policy played a decisive role by keeping inflation expectations anchored and the decline in inflation without a global recession is a major achievement.”

The Chancellor welcomed the improved forecast, but added there was “more work to do. That is why the Budget next week will be about fixing the foundations,” she said.

The welcome news that inflation fell to 1.7% last month may be short-lived, as the price of fuel is not expected to remain at its current level as Israel continues to prepare a retaliatory strike against Iran.

According to several Downing Street Veterans, Ms Reeves may not have the mandate for the measures she plans to introduce next week, and this may force her to break promises her Party made during the election campaign. The clock is most certainly ticking for the Government to begin to introduce the plans it said it had for the economy in its first few weeks in power.

The Government has promised public service reform – but Ms Reeves and Sir Keir Starmer ruled out tax rises “on working people” during the election campaign.

As a result, they could be forced to rely on stealth taxes such as freezing income tax thresholds or putting the onus on businesses.

For the financial markets, the next week cannot pass quickly enough. From Personal Financial Advisers to the Office for Budget Responsibility, experts want to know just how much taxes will be raised and how much, if any, public services will be cut.

As with many things in life, waiting is the worst part.

The pound continues to suffer at the hands of a dollar which is continuing to rally as market perceptions of the possibility of a rate cut in November fade. It is slightly different for Sterling versus the Euro. The pound rallied above the psychologically important 1.20 level yesterday, reaching 1.2028 and closing at 1.2023.

Meanwhile, the dollar continued to make strides, reaching 1.2949 before closing at 1.2984.

It was reported yesterday that the U.S. electorate is concerned that the economy may not be as strong as recent data has suggested. By concentrating on job creation, the Fed is ignoring a large tract of the economy where growth has been mediocre at best.

With the presidential election now looming large, the medium-term effect on the economy is being considered. Should Kamala Harris be victorious on November 5th, it will be business as usual, although she is expected to tweak several well-established policies. However, should Donald Trump win, he is likely to arrive in the White House like a tornado, with almost no part of the previous administration’s programmes left untouched.

Trump wants to see growth in the economy at any cost. He doesn’t consider the inflationary effect of loosening monetary policy. To get his way, he is considering the independence of the Federal Reserve, which has been “cast in stone” for decades.

He plans to demote the importance of the Vice Chairman for Regulation and create a new group to see how much economic growth is being held back by, in his words, irrelevant regulation.

This will send shock waves through the regional banking community, which is only just recovering from the failure of three regional banks a little over eighteen months ago.

He has been fiercely critical of Fed Chairman, Jerome Powell, who will survive in the role at Trump’s pleasure. There is speculation about who Trump would consider for Treasury Secretary, a cabinet post which is not subject to the approval of Congress.

Treasury Secretary Janet Yellen told world financial leaders Tuesday that the U.S. economy has grown stronger because the Biden administration rejected isolationism, offering a barely veiled criticism of Donald Trump’s policies.

She opened the annual meeting of the IMF/World Bank by highlighting U.S. economic growth since the nation was in the grips of the COVID-19 pandemic.

Without mentioning Trump by name, she said in a speech that the Biden administration had ended a period of international isolationism that “made America and the world worse off.”

We went from millions having lost their jobs to a historic labour market recovery, Yellen said. She said U.S. economic growth has been “almost twice as fast as most other advanced economies this year and last, even as inflation came down sooner.”

The IMF expects the world’s largest economy to expand 2.8% this year, down slightly from 2.9% in 2023 but an improvement on the 2.6% it had forecast for 2024 back in July.

The dollar continues to gain as the market is unclear whether the FOMC will cut rates again in November.

Jerome Powell is believed to feel that a further cut can wait until the third quarter is complete in terms of economic data, while several members of the FOMC have scaled back their dovish comments regarding inflation.

The dollar index looks set to challenge its recent highs around 104.80, although the market’s bullishness may be tempered as the market slips into election mode.

Yesterday, the index rallied to a high of 104.13 and closed at 104.08, its first close above 104 since August 1st.

It is emerging that there is a “third group” within the ECB’s Governing Council, which is committed to data dependence, while being prepared to promote growth in the economy, but not at the expense of stimulating inflation.

This “third group” joined forces on Tuesday to warn about the risk of inflation falling below the central bank’s 2% target, signalling a change in their focus after years of excessive price growth.

These more liberal Central Bankers have the Dutch Central Bank Governor, Klaas Knot, as their spokesperson.

Yesterday, Knot said at an event held by Bloomberg in New York. That interest rates are coming down again, so that should make debt serve burdens a little more sustainable.”

He went on to say that the financial system had navigated well the surge in rates launched by G7 central banks to tackle high inflation pressures.

European Central Bank policymakers have begun to debate whether interest rates need to be lowered enough to start stimulating the economy, ending years of economic restriction, conversations this week show.

The Central Bank Governors of France, Portugal and Finland argued on Tuesday that there may be an excessive drag on prices because the economy is so weak while the ECB is still restricting the economy with relatively high rates.

These comments will likely reinforce bets for continued quick rate cuts, with markets already anticipating a reduction in borrowing costs at each ECB meeting through next spring.

The ECB has been cutting rates quickly this year, but policymakers have so far said the goal is a neutral setting, where the central bank is neither slowing nor stimulating growth in the hopes this will keep inflation stable.

The three rate cuts made by the ECB since its recent pivot won’t yet have the effect of stimulating growth, since they are not below a level which is considered restrictive.

There is no doubt that what constitutes a neutral level will be the subject of heated discussion among Governing Council members.

It is still unclear if another rate cut will be sanctioned before the end of the year despite “experts” views on monetary policy. Were that to happen, it would show the Central Bank’s determination to stimulate the economy since it would have cut rates by a full one per cent in a relatively short time, and demonstrate a new-found proactivity, which has been sadly lacking in its deliberations for a considerable time.

The market is of the view that interest rates will continue to fall, which has seen the Euro lose ground constantly since the start of the month as the divergence in monetary policy between the Eurozone and the U.S. gathers pace.

Yesterday, the single currency fell to a low of 1.0792 and closed at 1.0802.

Have a great day!