UK to Be the Only G-7 Economy in Recession This Year, IMF Says
(Bloomberg) — Britain faces the bleakest two years of any major industrial nation with a recession in 2023 and the slowest growth of peers in 2024, the International Monetary Fund predicts.
The UK will be the only Group of Seven member whose economy will shrink this year, with a contraction of 0.6%, the IMF said. The Washington-based institution downgraded its outlook by a massive 0.9 percentage point from October, saying higher interest rates and taxes along with government spending restraint will exacerbate a cost-of-living crisis.
The forecast highlights the challenges Prime Minister Rishi Sunak’s government faces in the leadup to the next election. Chancellor of the Exchequer Jeremy Hunt suggested the economy is likely to perform better than the IMF expects.
“The governor of the Bank of England recently said that any UK recession this year is likely to be shallower than previously predicted,” Hunt said in a statement. “We are not immune to the pressures hitting nearly all advanced economies. Short-term challenges should not obscure our long-term prospects.”
In 2024, the economy will rebound only slowly, growing at 0.9% — matching Japan and Italy at the bottom of the G-7 league table for growth.
The forecast anticipates the first UK recession, excluding the pandemic, since the financial crisis in 2009. Across the two years leading up to the deadline for Prime Minister Rishi Sunak to call an election, the economy will effectively stagnate — expanding just 0.3%.
The IMF did not downgrade any other G-7 economy this year as it raised its global growth forecast from 2.7% to a still sluggish 2.9%. An escalation of the war in Ukraine or a health crisis in China as Covid spreads could set back the world economy, it said in its World Economic Outlook update. However, “adverse risks have moderated since October.”
The downgrade to UK growth is striking because the IMF’s October forecast was prepared before the £45 billion ($55.7 billion) unfunded tax giveaway in the September budget during the short-lived Liz Truss premiership. At the time, the fund said the fiscal splurge would have boosted growth.
Since then financial conditions have tightened, rising borrowing costs for businesses and households. The Bank of England has raised rates from 2.25% to 3.5%, and markets now expect rates to settle around 4.5%. The IMF said it’s downgrade also reflected “tighter fiscal” policy but, according to Treasury figures, fiscal policy is looser this year than at the last forecast.
In October, the IMF attacked the UK’s massive spending spree — arguing that fiscal and monetary policy should not be working at cross purposes and that the government needed to bring the public finances under control.
IMF Chief Economist Pierre-Olivier Gourinchas repeated the warning. In a blog post alongside the forecast, he said many countries are being too generous with their energy support, which is “costly and increasingly unsustainable.”
Instead, countries should “adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy,” Gourinchas said.
He also urged central banks, like the Bank of England, to press on with rate rises even if it means inflicting more misery on cash-strapped households. The BOE is expected to raise rates a half point to 4% on Thursday.
“Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path,” Gourinchas said. “Easing too early risks undoing all the gains achieved so far.”
- UK Wage Inflation Points to Another Big Rate Hike This Week
–With assistance from Andrew Atkinson.
Lower taxes, more government spending: What might Quebec’s next budget include?
The province’s economy is currently doing better than many expected, so the Quebec government will have some wiggle room in drafting this year’s budget, set to be unveiled on Tuesday.
What does that mean? More Quebecers are employed with good jobs than some economists had forecast. Crucially, for Finance Minister Eric Girard’s budget math, that also means those people are paying more taxes and fewer people are relying on social safety net programs.
That is welcome news for a government that has foreshadowed both spending increases and tax relief in its upcoming budget — “having your cake and eating it too,” according to some economists and political analysts.
It’s a strategy economists usually warn against. When the economy is going well, they say, governments shouldn’t necessarily offer tax relief but should instead take advantage of increased tax revenues to pay down debt — which Quebec has a lot of, some of which is due to recent expensive COVID-19 and inflation relief plans.
But that isn’t what the budget is likely to show on Tuesday. As usual, the finance minister has been close-lipped about the contents of the documents, but Girard did say that the government will stick to the commitments it made during last year’s election campaign — which likely means more spending, not less, along with a tax cut that some are criticizing as untimely.
So, here’s what you can expect:
One controversial promise that the CAQ has made is a pledge to cut taxes by one per cent for the two lowest tax brackets.
If the government comes through on that promise, which Girard has suggested it will, that would save a taxpayer earning $55,000 a year $378, but it will save higher-income earners even more.
During the election, Legault said Quebecers making $80,000 a year would save $630 in taxes per year.
It’s a proposal that has some economists raising their eyebrows.
Nearly 35 per cent of Quebec’s population will not earn enough income to benefit from the tax break according to l’Institut de recherche et d’informations socioéconomiques (IRIS).
“It would be an unfair tax cut because it would mainly favour taxpayers with higher incomes,” said Guillaume Hébert, a researcher with IRIS, in an interview.
The government has said the $2-billion measure would be paid for by the government reducing its payments to the Generations Fund, a rainy day fund.
That money, IRIS contends, would be better spent in the public sector, in the health or education system, for example.
The timing of the tax cuts, when the government is handling debt from COVID-19 relief measures and is promising to increase spending, is also causing concern.
“At some point, you want to make these promises, that’s fine,” said Moshe Lander, a senior lecturer in economics at Concordia University, “but it has to be accompanied by government spending cuts elsewhere or higher taxes, not lower taxes.”
But that isn’t what most observers expect.
In the lead-up to the 2022 election, where the CAQ secured a second four-year mandate, François Legault’s party made lots of expensive promises — $29.6-billion worth.
Not all of those promises are expected to appear in this year’s budget, but spending increases are likely.
“I think that they will increase health-care spending quite significantly and I think education is a major priority,” said Daniel Béland, the director of the McGill Institute for the Study of Canada. “So it’s a government that likes to be popular, right? [Legault] doesn’t like to bring bad news.”
It’s a combination, Béland said, of tax reductions and spending increases that appears to makes more sense as a political decision than an economic one.
It’s also a combination that would lead to a greater budget deficit — which happens when the government is spending more on programs than it receives from taxes.
But that deficit, Lander predicts, will be lower than expected – possibly around the $5-billion mark. A lower deficit than expected, however, deserves no praise because it is coming because of economic prosperity that the government did not engineer, he said.
“When a government tries to take credit for that and says that, you know, the deficit is smaller, they don’t deserve a pat on the back,” said Lander.
The smaller deficit, however, will allow them to couch the budget in optimistic language and a commitment to get back to budgetary equilibrium at some point down the line, Lander predicts.
“They’re gonna create the magic act of smaller deficit than expected on a path to balancing budget while at the same time cutting taxes and raising spending.”
Japan, Singapore, Hong Kong downplay effect of Credit Suisse woes
Asian financial authorities say Swiss lender’s takeover not likely to affect stability of local banks.
Financial authorities in Asia have moved to downplay the local fallout of the turmoil at Credit Suisse, saying they do not expect the takeover of the troubled Swiss bank to affect the stability of local lenders.
The Monetary Authority of Singapore (MAS) said on Monday that Credit Suisse would operate as normal in the city-state, with customers having full access to other accounts, following the lender’s purchase by UBS Group over the weekend.
“The takeover is not expected to have an impact on the stability of Singapore’s banking system,” MAS said in a statement.
“MAS will continue to closely monitor the domestic financial system and international developments, and stands ready to provide liquidity through its suite of facilities to ensure that Singapore’s financial system remains stable and financial markets continue to function in an orderly manner,” the city-state central bank said.
Hong Kong’s Monetary Authority (HKMA) and the city’s Securities and Futures Commission said that Credit Suisse is open for business as usual and the bank’s local assets of 100 billion Hong Kong dollars ($12.7bn) represent less than 0.5 percent of the total in the Chinese territory’s banking sector.
“The exposures of the local banking sector to Credit Suisse are insignificant,” HKMA said in a statement. “The Hong Kong banking sector is resilient with strong capital and liquidity positions. The total capital adequacy ratio of locally incorporated authorised institutions stood at 20.1 percent at the end of 2022, well above the international minimum requirement of 8 percent.”
In Japan, Chief Cabinet Secretary Hirokazu Matsuno welcomed moves by regulators to shore up confidence and said he did not expect the turmoil at lenders in Europe and the United States to spread to local banks.
“Japan’s financial system is stable as a whole,” Matsuno said.
The announcements came as markets in Asia slid in early morning trading on Monday amid persistent jitters over the health of the global financial system, with key indexes down in Japan, South Korea, Hong Kong and Australia. China’s blue-chip CSI300 and Shanghai Composite Index made gains, as new monetary-easing measures by Beijing helped to offset the concerns about global banking.
UBS, Switzerland’s largest bank, agreed to buy Credit Suisse for 3 billion Swiss francs ($3.24bn) on Sunday amid a growing crisis of confidence in the global banking system.
The Swiss government said the deal was necessary to prevent economic turmoil from spreading throughout the country.
Credit Suisse, which last week received a $54bn cash injection from the Swiss central bank, is the latest financial institution to face a loss of confidence following the collapse of Silicon Valley Bank and Signature Bank in the US.
The Zurich-based lender is among the world’s largest wealth managers and one of 30 banks considered to be of systemic importance to the global economy.
What Financial Crisis? US Economy Has Investor Backing, Survey Shows
(Bloomberg) — Markets have been trading as if the end of the world is at hand – but what most participants see, behind the recent financial turmoil and contagion fears, is a still-strong US economy, the MLIV Pulse survey shows.
The collapse of three US banks and the scramble to rescue others, including Europe’s Credit Suisse Group AG and First Republic Bank, sent stocks and bond yields plunging. Bets on Federal Reserve monetary tightening got dialed back, swap contracts reflect expectations for rate cuts within months, and recession warnings are ramping up.
Yet the world foreseen in those trades is hard to square with the one outlined by 519 investors, retail and professional, who took part the MLIV survey between March 13-17. Most respondents believe that a hard landing will be averted, with about two thirds predicting that the economy is either heading toward a soft landing, accelerating or cruising.
Most lean toward a scenario in which the Fed ekes out some more rate hikes, to bring inflation closer to target.
The survey findings suggest a mismatch between what investors see see as the likely economic outcomes, and the direction that trades have taken — driven by market momentum and concern that banking troubles could snowball.
“The thing about contagion risk is, it’s really about the spread of irrational fear,” said Greg Peters, co-chief investment officer of fixed income at PGIM.
The Swiss National Bank’s pledge of support for Credit Suisse helped calm the chaos. And the European Central Bank, which went ahead as planned with a half-point increase in interest rates on Thursday, suggested inflation-fighting hasn’t moved to the back burner for central banks – even though the ECB avoided signaling what comes next.
Read More: ECB Feared That Ditching Half-Point Hike Might Panic Investors
This week it’s the Fed’s turn. The US central bank still enjoys investor confidence, according to the MLIV survey. More than 60% of retail and professional investors alike said it hasn’t lost credibility.
Investors see the March 22 decision as being between a pause – on financial stability concerns — and a quarter-point hike to continue the inflation-busting campaign.
One key question is how much of the Fed’s desired financial tightening will now happen as a result of banks turning cautious. Credit spreads are an important channel through which market distress affects the real economy. So far, they haven’t widened to a degree that implies a significant slowdown.
Goldman Sachs Group Inc. economists estimate the likely impact from tighter lending conditions at up to 0.5% of US gross domestic product – a significant hit, but not commensurate with the degree of alarm on markets. The Goldman team continues to predict a soft landing, consistent with MLIV survey respondents.
The banking turmoil has clearly had a psychological impact, as well as shifting the Fed outlook. Almost half of MLIV respondents said a 50-point hike next week, the base case not long ago, would add to financial-system risks after the collapse of Silicon Valley Bank — the biggest US bank failure since the 2008 aftermath.
Read More: New Fed Bank Backstop Has Scope to Inject as Much as $2 Trillion
“The Fed is still on a long-run path of tightening policy to bring inflation down,” said Darrell Duffie, a Stanford University finance professor. “The most likely path for the Fed is that there’s a temporary pause in rates, maybe just until the next meeting after this coming one, and then the Fed would resume as dictated by data on inflation concerns.”
For the Fed, a big real-economy shock stemming from this month’s financial events is a risk, not a foregone outcome or even a likely one – while persistently high inflation is a fact, one that policymakers have battled against for a year with little progress to show so far.
So even if the US central bank chooses to pause this week, it could be a hawkish pause, one that allows markets to stabilize but increases the risk of more hikes to come.
Last Jenga Block?
Fed officials have flagged the hiring boom and rising wages as one of the main inflationary threats. A majority of MLIV respondents said the jobs market is either softening already or will do soon. Roughly one-third said that the shortage of workers means there may not be much cooling this year, and that higher rates will instead compress profit margins.
The Bloomberg Economics view is that a soft landing remains an outside bet, with a 75% chance of recession in the third quarter of this year. Fed hikes have in the past mostly ended up breaking things, and this cycle is likely no exception.
US INSIGHT: Recession Models Don’t Share Soft-Landing View (1)
That’s broadly the signal sent by plunging yields in the past week, according to Matthew McLennan, co-head of the global value team at First Eagle Investment Management.
“The bond market is telling you that the last block has been taken out of the Jenga stack by the Fed,” he said. After all the banking stress, “lending growth will probably slow — which raises the probability that nominal growth slows. You can see how this could translate to a recession.”
MLIV Pulse is a weekly survey of readers of the Bloomberg Professional Service and website, conducted by Bloomberg’s Markets Live team, which also runs a 24/7 MLIV Blog on the terminal. To subscribe to MLIV Pulse stories, click here.
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