FTSE 100 hits six-month low as IMF slashes growth forecasts - business live

Graeme Wearden

from on 2018-10-09 15:47 (#40EDG)

Rolling coverage of the latest economic and financial news, as the International Monetary Fund says UK has 'flexibility' to raise spending in the budget

Latest: Venezuelan inflation expected to hit 10,000,000%
IMF: UK has flexibility to boost short term public spending
Fund: Cuts should be eased if Hard Brexit materialises
IMF has also cut global growth forecasts

6.36pm BST

Here's our news story on today's Bank of England Brexit warning:

6.21pm BST

The IMF's new, less-rosy, growth forecasts didn't help the mood in the markets today either.

Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM says:

The headline that the IMF has downgraded its economic growth projections for the first time since July 2016 is naturally not positive news for investor sentiment. There are a few ways that this news can be digested. One is to accept that expecting global growth at a rate of 3.7% in comparison to 3.9% still represents a healthy pace of growth when you consider the severe turbulence that the global economy has faced over the past 10 years.

But on the other side, there are concerning comments from the IMF that a combination of trade tensions and stress in emerging markets is behind the modest downgrade in growth expectations, along with even more worrying comments that the IMF is concerned that global growth might have plateaued, indicates to a degree that there are also reasons for investors to be uneasy about the IMF downgrade.

IMF cuts world economic growth forecasts as import tariffs, emerging market issues bite. Now forecasts 2018 and 2019 global GDP +3.7%, both down from 3.9% previously. Big cuts to Germany, Brazil, S Africa this year, and emerging markets in general next. https://t.co/2CGGv8dNYF pic.twitter.com/5sGEKUifAn

6.18pm BST

Trading today was dominated by the now-familiar worries over the US government bond market, and Italy's face-off with EU budget rules.

Fiona Cincotta of City Index sums up the day:

The FTSE managed to sustain the high note it opened on throughout most of the day despite briefly being spooked by the US markets when Wall Street opened. A mixed bag of gainers dominated London trading, some more obvious than others. Miners and oil firms drew strength from higher commodity prices and banks, retailers and insurers had a chance to rally during a lull in negative news.

The Italian economic drama continues being played out with the Italian finance minister trying but failing to reassure both the markets and his European colleagues that Italy is keen to reach an agreement over its budget with the EU. The market remains far from reassured as is visible from the rising risk premium on Italian bonds and the spread between Italy's 10-year paper and German Bunds. The week is likely to see more volatility as Italy makes a decision on the government's draft budget plans which it will then submit to the European Commission for review early next week.

4.47pm BST

A late recovery has helped the FTSE 100 end the day a little higher.

The blue-chip index has closed at 7,237, up 4 points or 0.05%, after several days of losses.

3.05pm BST

Wall Street has opened cautiously, following the news that the IMF had cut its global growth forecasts.

2.57pm BST

OMG:

1.50pm BST

In the markets, the FTSE 100 has sunk to a fresh six-month low after the IMF slashed its global growth forecasts.

The blue-chip index has dropped by over 0.5% to below 7,200 points, for the first time since April.

Addressing the Italian parliament in Rome, finance minister Giovanni Tria ended up doing little to reassure nervous investors.

Though he said there will now be a 'constructive dialogue' with the EU Commission, the fact he called the output targets contained in the budget 'prudent' suggested Italy isn't ready to shift on the spending plans that have so upset Brussels.

1.10pm BST

Speaking of Italy.... economy minister Giovanni Tria has called for constructive talks with EU partners over the 2019 budget.

"There will now be a constructive discussion with Europe to show the well-founded reasons for this government's growth strategy."

A spread at 400, 500? We are committed to making the spread reflect the (economic) fundamentals. If it goes to 500, the government will do what it needs to do,.

If everyone sells, we will have capital outflows and we will have to face the situation. Faced with a financial crisis, the government will do what it must do, as (ECB president Mario) Draghi did."

12.42pm BST

Over in Bali, the IMF is risking a row with Italy's new government.

The Fund's chief economist, Maurice Obstfeld, insisted today that Rome should comply with Brussels' rules on budget deficits, rather than boosting spending as ministers have promised.

"Our concern about Italy is that there is a real imperative for the fiscal policy to maintain the confidence of markets.

"And we have seen the spreads increase over the past months. This has certainly contributed to our downgrade of Italian growth and makes the economy more susceptible to shocks.

ITALY'S SAVONA SAYS BELIEVES ITALY GDP CAN GROW BY 2 PCT IN 2019, 3 PCT IN 2020

11.57am BST

Back in July, Venezuelan fruit seller Pacheco told our reporters about the pain of rampant inflation:

"It's crazy to accept notes of 100, 500, or 1,000 bolivares," said Pacheco, a wiry 61-year-old, whose humble stall clings to the fringe of one of the major markets in Ciudad Guayana, a city in Venezuela's southern Bolivar state.

He now only accepts newly minted 100,000 bolivar notes, which due to demand are hard to come by. "Otherwise it's a box [full of notes] that afterwards we have to take to the bank," he said.

11.16am BST

There's no cheer for Venezuela in today's World Economic Outlook.

The International Monetary Fund predicts that prices in its ravaged economy will surge by 1.37 million percent this year, as its hyperinflation accelerates.

Venezuela's hyperinflation is expected to worsen rapidly, fueled by monetary financing of large fiscal deficits and loss of confidence in the currency.

Venezuela's economy continues to decline for the fifth consecutive year, following a 14% drop in 2017.

Real GDP is projected to shrink by 18% in 2018 and a further 5% in 2019, driven by plummeting oil production, and political and social instability.

10.59am BST

Professor Costas Milas of the University of Liverpool has crunched data from the last four IMF reports, including today's one.

It shows that the IMF has steadily downgraded its forecasts for investment in the UK economy, as a share of the economy, since the EU referendum.

As the Referendum takes place and we move on, IMF downgrades its subsequent forecasts for Total Investments (% of GDP) in the UK. This can be seen here:

Without doubt, lower investment spending takes its toll on the economy as evidenced from IMF's successive forecasts for UK GDP growth, as shown here:

10.37am BST

The IMF remains hopeful that Britain and the EU will reach an agreement, avoiding the perils of a cliff-edge Brexit.

Maurice Obstfeld, the IMF's chief economist, said the UK was in a position to use government funds, should it need to, in the event of a No-Deal Brexit, but this was not what the Washington-based forecaster was expecting.

On Brexit, our baseline forecast, which underlies our forecast for the U.K. and for the eurozone, is that a deal will be reached. It will be one in which trade in goods is essentially tariff"free, which would allow most supply chains to remain intact. It is one in which the regime for financial services would be, you know, quite favorable to the U.K. And I recognize that that is an optimistic scenario, but we tend to assume that when some set of economic arrangements is clearly in the joint interest of the negotiators, that somehow, they will manage to make this come about.

Obviously, if this does not come about, if there are arrangements which are more restrictive of trade, which put up more barriers which disrupt supply chains, then this is going to be more challenging for both the U.K. and its eurozone partners. And there are some very critical areas where, you know, a technical agreement does have to be reached; for example, on how to handle clearing of derivatives over the transition from old arrangements to new arrangements.

10.28am BST

Here's some reaction to the IMF report:

Quite something that Conservative commitment to tight fiscal policy is too much even for the IMF https://t.co/MOXZ4YrezJ

Calm markets with a nervous feel, a focus on politics, a background of discord between Brussels and Rome, Washington and Beijing, and the IMF mot-du-jour is 'plateauing' which loosely translates as 'about to slow down'

Also says #monetary policy should be flexible. #IMF urges #UK to lift #public #spending after a hard #Brexit https://t.co/sbnKEgdujP via @financialtimes

10.03am BST

The Bank of England has issued its strongest warning yet to the European Union that its lack of planning for Brexit is creating growing risks for almost 70tn of complex financial derivatives.

"In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services."

10.00am BST

The IMF has also slashed its outlook for emerging market economies, following a swathe of crises in Turkey, Argentina and beyond.

It now expects developing economies to expand by 4.7% this year and in 2019, down from 4.9% and 5.1% previously.

9.38am BST

On the other hand.... perhaps the IMF and the UK government are of one mind on the Brexit issue...

My colleague Phillip Inman doesn't believe the Treasury will be pulling its hair out:

The Treasury has said it needs to keep its powder dry in case of a bad Brexit.

Hammond's stance is that he may need to use fiscal space in the event of a bad Brexit. He has never said there are few policy options available, as if he would just let UK crash. Likewise, the Bank of England has never said it will raise interest rates.

9.38am BST

9.20am BST

The IMF has also cautioned that UK growth remains weak, partly due to uncertainty over Britain's exit from the EU:

In the United Kingdom, growth is projected to slow to 1.4 percent in 2018 and 1.5 percent in 2019 (from 1.7 percent in 2017). This forecast represents a downward revision of 0.2 percentage point for 2018 relative to the April 2018 WEO [World Economic Outlook], driven by weak growth in the first quarter of the year, partly due to weather-related factors.

The medium-term growth forecast remains at 1.6 percent, weighed down by the anticipated higher barriers to trade following Brexit.

9.05am BST

The Treasury, and the Bank of England, may not be happy with the IMF's recommendation to spend more if Britain crashes out of the EU without a deal.

As Chris Giles of the Financial Times explains:

The fund's advice will frustrate both the BoE and Treasury, which had presented a united front, saying there were few policy options available to soften the blow of a so-called no-deal Brexit.

They have argued that crashing out of the EU represents a big disruption to supply across the economy, which would knock public finances and fuel inflationary pressure, requiring higher interest rates.

8.59am BST

The IMF's views could also be a boon to the opposition Labour party.

At last month's party conference, Jeremy Corbyn outlined several spending pledges, including more free childcare for pre-school children, while also maintaining the triple-lock on the state pension, the winter fuel allowance, and free pensioner bus passes.

8.41am BST

The IMF has also urged the Bank of England to be cautious about raising interest rates.

With Brexit uncertainty hanging over the economy like a fog, the BoE should show flexibility, it argues:

In the United Kingdom, where the output gap is closed and unemployment is low, a modest tightening of monetary policy may be warranted, although at a time of heightened uncertainty, monetary policy should remain flexible in response to changing conditions associated with the Brexit negotiations.

8.27am BST

The International Monetary Fund has given Theresa May a boost, arguing that her government has the flexibility to boost public spending.

In its latest World Economic Outlook, the Fund says that the UK has the room to ease back on cuts, perhaps as soon as this month's Budget.

In the United Kingdom, the fiscal targets-which envisage the cyclically adjusted public sector deficit falling below 2 percent of GDP and public debt beginning to decline by 2020-21-provide an anchor for medium-term objectives while allowing for flexibility in the short term.

The pace of fiscal consolidation can be eased if risks materialize and growth slows sharply.

7.58am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

In the United States, momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of US imports from China.

Growth projections have been marked down for the euro area and the United Kingdom, following surprises that suppressed activity in early 2018

IMF cuts 2018 #GDP growth forecast to 3.7% (from 3.9%) on #Tradewar! pic.twitter.com/KoUW8Qoiu0

The Washington-based lender's economists are usually reluctant to name and shame individual countries, but it is clear that attacks by the Trump administration on the postwar consensus of open trade and cooperation over issues such as climate change has prompted more direct references to the US than previously seen.

In its world economic outlook, which is published twice a year, with the latest issued before the fund's annual meeting in Bali this week, officials warned that the lingering threat of higher trade barriers meant there was a greater likelihood it would downgrade its growth forecasts during its next review.

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