It was again another mixed bag in markets yesterday with good data mixed in with bad and sentiment both damaged and encouraged by comments from various of the global economic elite.
The IMF led the charge yesterday with their latest World Economic Outlook lowering global growth estimations by another 0.75 per cent. Growth is now predicted in the global economy to expand by 3.25% in 2012 which has got a lot of people into a panic but shouldn’t necessarily do so. 3.25% growth is OK, middling, not bad and markets, politicians and members of the public need to forget the days of 6-7% global growth as they are not returning any time soon. The reasons behind the IMF outlook shift are pretty obvious; probable recession in Europe through 2012, the effects of bank deleveraging on businesses and consumers and fiscal contraction capping government spending.
The big slashes in growth came in Europe. Italy was forecast to grow by around 0.3% in 2012 according to the previous Outlook, yesterday saw that number slashed to -2.2%. This would contribute to a 0.5% fall in output Europe-wide. The UK was not able to escape the downgrades either with growth cut to 0.6% this year compared to 1.6% previously. While the IMF have previously been full-square behind the UK’s deficit reduction plans, yesterday they made sure to emphasise that “Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the Euro area, should reconsider the pace of near-term fiscal consolidation.”
The euro strengthened on this announcement strangely, probably as a result of the IMF calling the forthcoming recession in Europe “mild”. It had been marked lower on the day earlier as EURUSD pushed to 3 week highs and traders and investors took profits. EURUSD has managed to hold the 1.30 level overnight while GBPEUR is back below the 1.20 mark. It had moved higher on decent PMI numbers from Germany and France early in the day and a Spanish bill auction that was once again well bid for with lower yields than previous sales.
It is key day for the pound today with the first estimate of Q4 GDP for the UK coming out at 09.30. We were one of the most bearish forecasters in November with our call for growth of 0.1%; it now seems we will be near the top end of things. The market is looking for a number of -0.1% with the high number 0.2% and the low -0.7%. The risk is obviously balanced towards the downside but any positive figure could see sterling fly. Alongside this GDP number we have the latest Bank of England minutes which should be a bit of a non-event.
Before that we also have the latest German IFO reading of the current business climate which, like last week’s ZEW number, is expected to bounce positively. The main German news, and by extension European news, is Angela Merkel’s speech to the World Economic Forum in Davos. She takes to the lectern at 15.00 GMT.
The Fed also releases its latest monetary policy statement at 17.30 GMT and markets will be looking for indications of another round of QE sooner rather than later despite the recent uptick in the fortunes of the US economy.