IMF set to upgrade UK growth forecasts as global economy expands

Forecast growth of 1.9% this year expected to be raised to 2.4% with IMF chief Christine Lagarde declaring 'optimism is in the air'

The International Monetary Fund is widely expected to raise its outlook for the UK on Tuesday, pushing up the country's growth forecasts by more than for any other major economy.

The Washington-based fund has been a critic of the UK's over-dependence on consumers as well as the government's Help to Buy housing market scheme. But it will bring a welcome boost to chancellor George Osborne when it updates its World Economic Outlook from last October's forecasts.

Back then it predicted UK national output would rise 1.9% in 2014 but is now expected to predict growth of 2.4%, according to a Sky News report. The IMF said it did not comment on leaks.

The fund is also expected to upgrade its outlook for the global economy, which in October it said would expand by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year's speech from its managing director, Christine Lagarde, last week.

"This crisis still lingers. Yet optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years," she said.

If confirmed, the substantial upgrade to the UK is likely to be seized on by Osborne as further proof the coalition's "economic plan is working" – an oft-used phrase in recent weeks as indicators have largely pointed to growth picking up.

The fund has in the past been highly critical of the coalition's austerity drive. In a damning indictment of the British chancellor's economic policies last year, the IMF's chief economist Olivier Blanchard warned Osborne would be "playing with fire" unless he eased the pace of budget cuts.

The IMF has also echoed other economists, including experts at the UK's own Office for Budget Responsibility, who said that the UK remains over-dependent on debt-fulled household spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK's outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, the British Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic adviser to the EY ITEM Club said: "It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government's Achilles heel and could prove to be the weak spot in the recovery.

"Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio."

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The overall unemployment rate for the UK has been coming down faster than policymakers and most other forecasters had expected. Official data on Wednesday are expected to give a jobless rate of 7.3% for November, down from 7.4% the previous month.

Many economists expect the continuing drop in unemployment will prompt the Bank of England to tweak its forward guidance. At the moment, the BoE's guidance is that, barring various exceptions, it will not consider raising interest rates from their current 0.5% until a threshold of 7% unemployment is reached. The Bank may well lower that threshold for considering a hike to 6.5% unemployment, economists say.

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World Bank: Global economy at turning point

The global economy is at a "turning point",the World Bank has said, as it forecasts stronger growth for 2014.

In its annual report on the world economy, the bank said richer countries appeared to be "finally turning a corner" after the financial crisis.

That is expected to support stronger growth in developing economies.

But it warned growth prospects "remained vulnerable" to the impact of the withdrawal of economic stimulus measures in the US.

The US Federal Reserve has already begun to wind down its monthly bond-buying programme, previously set at $85bn (£52bn) a month.

'Crisis risks'

There is concern this could push up global interest rates, which could affect the flow of money in and out of developing countries and lead to more volatile international financial markets.

The World Bank warned that some developing countries "could face crisis risks" if the unwinding of stimulus measures was accompanied by market volatility.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank group president Jim Yong Kim.

"The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets."

The bank forecasts that global GDP will grow by 3.2% this year, up from 2.4% in 2013, with much of the pick-up coming from developed economies.

Developing nations will grow by 5.3% this year, up from 4.8% in 2013.

In an interview with BBC economics correspondent Andrew Walker, World Bank economist Andrew Burns acknowledged that Brazil, Turkey, India and Indonesia were among the countries that could be vulnerable to the impact of US stimulus withdrawal.

However he also noted that the first concrete steps taken by the Federal Reserve to cut back its programme of buying financial assets last month did not severely disturb the markets.

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UK manufacturing sector to grow faster than economy next year

Industry report gives buoyant forecast for UK manufacturing, predicting 2.7% growth compared with 2.4% for economy

Manufacturing will grow faster than the overall UK economy next year but much-needed business from overseas markets is looking shakier, according to an industry report published on Monday.

The buoyant forecast from UK manufacturers' organisation EEF marks a turnaround for a sector the government has repeatedly championed as an engine for growth, but which has struggled to emerge from recession.

News that orders and output are now rising and that UK factories plan to ramp up hiring and investment will be welcomed by George Osborne as he prepares to outline his latest plans to boost the recovery in his autumn statement this week.

But EEF's latest survey with accountants BDO showed exports were weaker than expected in recent months on the back of slower growth from some emerging markets and sluggishness in the eurozone, the UK's most important market.

EEF chief economist Lee Hopley said: "Over the course of the year we have seen a definite turnaround in prospects for manufacturing and this looks set to continue into next year. This increased confidence is evident in companies looking to increase their headcount and, most importantly for balanced growth, step up their investment.

"However, uncertainties in the global economy remain and a sustained recovery is not secure. As a result, growth must remain a priority for government over the remainder of this parliament, starting with the autumn statement this week."

The group, which has 6,000 member companies, says the risk comes from an uncertain export outlook. But it still thinks the sector will grow by 2.7% in 2014 compared with 2.4% for the economy overall. EEF thinks that this year the manufacturing sector will have contracted 0.1% while the wider economy grows 1.4%.

While that still puts that manufacturing sector in recession this year, the prediction marks a significant upgrade from the last estimate of a 0.5% decline. The group said that reflected a run of improving news. Its own quarterly survey showed a majority of firms reporting growth in both output and orders, though these measures slipped back from highs seen over the summer. Within the sector, the strongest results came from motor vehicle and electronics companies.

A separate report on Monday echoes recent optimism about new jobs being created by the private sector. Business lobby group the CBI says medium-sized businesses are helping to drive the recovery but that the government must do more to help them access finance, find skilled workers and get support to export.

Despite accounting for less than 2% of the private sector, medium-sized businesses have created jobs at twice the pace of large companies, the CBI said. They added 185,000 jobs between March 2010 and March 2013, a rise of 4.1%, and now employ 16% of the UK's total workforce.

Medium-sized firms, classed as having 50-499 staff and a turnover of £10m-£100m, have also grown their turnover by 7% – more than double that of smaller firms and large companies. They now contribute more than £300bn to the economy, but the lobby group says government support could boost that significantly.

"This hugely positive picture is reflected up and down the country where medium-sized businesses are major local employers, in many cases helping to offset public sector job losses during the downturn," said CBI director general John Cridland.

"With better access to a range of growth finance options, improved training and research support, and help to break into new export markets – these firms could be worth an extra £20bn to our economy by 2020."

Article Source : http://www.guardian.co.uk
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China prepares to liberalise finance as hedge funds and estate agents salivate

Beijing is making prepartions to let its money off the leash, and the repercussions will be felt everywhere

It's a long way from Beijing to Belgravia but London's upmarket estate agents would be well advised to keep a close eye on developments in China over the next 10 days. The price of a mansion in London's more fashionable districts is rising fast. Cash buyers from overseas have snapped up houses with little or no regard of the cost, creating a property microclimate divorced from the rest of the market.

The Bank of England is keeping tabs on the boom, concerned that the flood of foreign cash pushing up the price of mansions could – if left unchecked – herald the start of the next bubble.

Well, you ain't seen nothing yet. The freeing up of China's economy over the past 35 years has been methodical. First it was agriculture. Then it was industry. Now, the next phase of liberalisation planned by the ruling cadre of the Communist party includes finance.

A host of possible reforms are being considered. These include offering higher interest rates for domestic savers backed up by deposit insurance for savings accounts and making China's currency, the renminbi, convertible.

Unfettered movement of capital out of China is not going to happen overnight, but it could happen within five to 10 years. That's why George Osborne was in China last month seeking to make London the global hub for dealings in the renminbi. That is why fund managers, hedge funds, private equity firms and property specialists in Britain are licking their lips.

China's leaders have encouraged speculation that radical change is afoot by talking about a "masterplan" for the economy. There have been signs that Beijing is prepared to sacrifice quantity for quality: accepting that growth needs to be slower but more sustainable.

Although living standards have risen sharply, China's economic model is investment-intensive. There has been a rapid expansion of industrial capacity to provide goods for export. Heavy debts have been incurred in the process, particularly by local government. The sluggish recovery in the global economy that followed the financial crisis of 2007-08 means that demand for China's manufactured products is growing less quickly than it once was. Hence the feeling that the economy needs more of a domestic focus and that capital should be used less wastefully.

The internal debates about the future of the economy will come to a head next weekend when the central committee of the Communist party meets in its third plenary session since it was elected for a five-year term in 2012.

Historically, the so-called third plenum has been the occasion for the party hierarchy to focus on the economy, followed by big shifts in policy. It was at the third plenum in 1978 that Deng Xiaoping announced the opening up of the Chinese economy: the move that triggered 35 years of stupendous growth.

Fifteen years later, Deng said the economy needed more investment and had to become more export-focused. Within a decade, the country's success in breaking into western markets was crowned by admission into the World Trade Organisation. WTO membership, together with a period in the early 2000s when the global economy was expanding at its fastest rate since the late 1960s and early 1970s, meant there was little pressure to reform China's economy. It was hard to argue with growth rates of 10% and record rates of poverty reduction. Now, though, expectations are high that President Xi Jinping and Premier Li Keqiang will act.

Analysts at Capital Economics say the third plenum will come up with a direction of travel rather than a detailed policy programme. But they expect the new leadership to address three key issues: the low share of national income going to average households; the dominant role of the state in much of the economy; and the inefficient use of capital.

Xi and Li are likely to proceed with caution. There will be strong opposition to reform from vested interests who like the status quo. What's more, China's fragile financial sector needs handling with care. The balance sheets of commercial banks and the shadow banking sector are bloated with loans to state-owned enterprises and real estate companies. Many of these loans are non-performing, and there are enough parallels between China today and the United States half a dozen years ago if Beijing wishes to observe the consequences of over-hasty or badly sequenced reforms.

Even so, the feeling seems to be that ducking the need for change will merely store up even bigger problems for the future. Deregulation, land reform and a strengthening of the social security system are on the agenda.

But it will be financial reform that will be of most interest to the outside world. There has been liberalisation in this sector but Capital Economics says this is set to accelerate by allowing the renminbi to operate in a wider trading band, allowing full private ownership of banks, facilitating the development of the corporate bond market and loosening curbs on cross-border capital flows.

In the US, there has been much agonising over the emergence of China as a rival economic superpower. America's trade deficit with China has been a particular cause of concern, with Beijing accused of manipulating the renminbi exchange rate to dump goods in the west. Fears have been expressed that America is vulnerable to a financial Pearl Harbor: a sudden decision by Beijing to stop buying US Treasury bills.

In the light of what is going to be discussed later this week, such fears look overblown. That's not just because such a move would be a pyrrhic victory for China, since it would destroy the value of its assets. It's also because bit by bit, China's economy – if not its political structure – is being reshaped along the lines sought by Wall Street and by American-owned transnational corporations.

Back in the late 1990s, US multinationals demanded that China accept more stringent conditions than had been imposed on other developing countries in order to secure WTO membership. Beijing accepted. Now America wants two things: China's financial sector to be opened up to US banks and the country's savings to boost western capital markets. More than likely, Washington will get its way, perhaps not immediately but with profound effects.

Why? Well, consider this. America, the world's biggest economy, has savings of $2.8tn (£1.7tn); China has more than $4tn. As a result, the impact of financial liberalisation in China will make the flow of funds into the west from Russian oligarchs look inconsequential.

As Diana Choyleva of Lombard Street Research notes, China's elite already sends its children to Britain to be educated. The money is about to follow. Which is why the hedge-fund owners of Mayfair and the estate agents of Belgravia have every reason to be cheerful.

Article Source : http://www.guardian.co.uk
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Christine Lagarde tells US that debt crisis threatens world economy

IMF chief says US politicians must overcome shutdown and raise US debt ceiling before 17 October deadline

Shares in New York fell sharply on Thursday after the US Treasury warned that the budget fight between Republicans and Democrats in Washington risked plunging the world's biggest economy into its worst slump since the Great Depression.

President Barack Obama turned up the pressure on Republicans on Capitol Hill after the Treasury and the International Monetary Fund joined senior Wall Street figures in urging a deal well ahead of the deadline for raising America's debt ceiling on 17 October.

"A default would be unprecedented and has the potential to be catastrophic," the Treasury reported.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The recession of five years ago was the most severe the US has suffered and the economy has recovered only slowly from the damage caused by the financial crash. A health check of the service sector showed a marked slowdown in activity even before large parts of the federal government were shut down as a result of the failure to agree a budget deal.

Obama accused the Tea Party wing of the Republicans of being "extremists" who were "demanding a ransom for doing their jobs". The president added: "Congress has to pass a budget that funds our government with no partisan strings attached."

Heightened anxiety in the financial markets was reflected in an early 170 point fall in the Dow Jones industrial average and a rise in interest rates for one-month US Treasury bonds.

Christine Lagarde, the IMF's managing director, urged America's politicians to settle their differences before the dispute harmed the entire global economy.

Speaking ahead of the fund's annual meeting in Washington next week, Lagarde said it was "mission critical" that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09.

"I have said many times before that the US needs to "slow down and hurry up" – by that I mean less fiscal adjustment today and more tomorrow," Lagarde said. She added that the world's biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending such as medicare that did not jeopardise short-term growth.

"In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.

"So it is 'mission-critical' that this be resolved as soon as possible."

Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.

Lagarde's speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington. The IMF managing director said America's recovery was being held back by over-hasty budget cuts. "Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low – below 2% – due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher."

Lagarde said: "We at the IMF are very familiar with the ebb and flow of economic cycles, with the shift from recession to recovery. Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer."

Article Source : http://www.guardian.co.uk

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