Middle East oil shock would lead to higher interest rates, warns IMF; FTSE 100’s worst day in nine months – as it happened

Newsflash: the UK is set to be one of the slowest growing major economies this year, although Germany will lag further behind.

The International Monetary Fund’s latest World Economic Outlook, just released, shows that the global economy is set to grow by 3.2% in both 2024 and 2025, matching its expansion in 2023.

Advanced economies are seen expanding by 1.7% this year, rising to 1.8% in 2025.

But Britain will be towards the back of the pack; UK GDP is forecast to rise by 0.5% this year, before accelerating to 1.5% next year. That’s a small downgrade on the Fund’s forecasts back in January.

Germany will be even slower though, with GDP set to rise just 0.2% in 2024, and 1.3% in 2025.

Italy is expected to grow by 0.7% in each year, while Japan’s GDP is seen rising 0.9%, and then 1%.

France is expected to grow by 0.7%, and then 1.4%.

While the US will continue to lead the way, expected to expand by 2.7% and then 1.9%.

The City slightly trimmed its forecast for how quickly the Bank of England will cut interest rates this year, following this morning’s labour market data.

The money markets are now pricing in around 46 basis points of cuts this year, down from a previous forecast of 50bp (which is exactly half a percent).

That suggests that two quarter-point rate cuts, bringing Bank rate down from 5.25% to 4.75% by December, are no longer fully priced in.

The Bank has to weigh up the rise in unemployment and fall in employment (suggesting a cooling economy) alongside strong basic pay growth of 6% (which implies inflationary pressures are still strong), when deciding when it is safe to start loosening monetary policy.

Bank of America has reported a drop in earnings, as provisions for bad debts increased and profits from high interest rates faded.

BofA’s net income fell to $6.7bn in the first quarter of this year, a 18% drop on the $8.2bn it made a year before.

Its net interest income (NII), the money a bank makes by charging higher interest on loans than deposits, shrank by 3%. BofA says “higher deposit costs more than offset higher asset yields and modest loan growth”.

Provision for credit losses have risen to $1.3 billion, up from $1.1bn in Q4 2023 and $931m a year ago.

An activist hedge fund has stoked concerns over a corporate flight from the London Stock Exchange after calling on British oil services firm Wood Group to reconsider its UK listing or sell itself off.

In a letter to Wood’s board Franck Tuil, the founder of Sparta Capital Management, he was “frustrated by the continued underperformance of the shares” when compared to rival engineering companies listed in the US.

The intervention by Tuil, a former senior portfolio manager at hedge fund Elliott, comes amid rising fears in the City that oil giant Shell may abandon its place at the top of the FTSE 100 in favour of a listing in the US because it believes European investors undervalue the company.

BP’s future on the LSE has also come into doubt after reports that the UAE’s state oil company, Adnoc, had considered a multi-billion pound takeover bid of the company which has also contended with a lagging share price in recent years.

Wood Group’s market valuation has tumbled by over a third in the last year following the collapse of a takeover bid by US-based Apollo Global Management. Since the $2.1bn takeover bid fell apart Wood’s share price has slumped to value the company at $1.21bn.

Tuil said:

“We believe that the board must be realistic on how it can best achieve fair value for shareholders; if the UK public markets are unwilling or unable to engage in Wood’s story, we believe you should undertake a strategic review and actively seek alternative solutions.”

Wood Group declined to comment.

With a general election no more than nine months away, Britain may have soon have a new chancellor.

And the Institute for Fiscal Studies have produced an excellent interactive tool to show the challenge she, or he, will face to manage the nation’s finance.

Their ‘Be the Chancellor’ tool launched today shows the trade-offs and fiscal challenge awaiting the next government. It shows the impact on the public finances of changing departmental spending, and of altering a wide range of taxes.

It also shows how faster, or slower, growth affects the tax take.

Calculating the cost, or fiscal benefit, of each decision, it shows whether your Treasury would hit the target of having debt falling, as a share of national income, in five years.

The tool even lets you add your own fiscal policy, if there’s something you’re desperate to tax (or stop taxing).

You can try it here.

Hitting the fiscal mandate became easier this month, as the UK entered a new fiscal year in April. That means the target to get debt/GDP falling moved a year into the future.

The IFS says this could create an extra £12bn of fiscal firepower for spending increases or tax cuts:

While difficult to predict with precision, we estimate that this mechanical rolling forward of the forecast could, all else equal, add something like £12 billion to Chancellor Jeremy Hunt’s ‘headroom’ against his fiscal mandate – a target that Rachel Reeves has promised to retain if Labour forms the next government

The global economy is likely to slow further this year, the United Nations trade body has warned today.

UN Trade and Development predicts global growth will slow to 2.6% this year, down from 2.7% in 2023, as falling investment and subdued trade dynamics hit the world economy.

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In a new report, it warns that monetary policy alone cannot solve all pressing global challenges, even if higher interest rates do bring down inflation.

UN Trade and Development warns that the better-than-expected growth recorded in 2023 is now being ‘squandered’, saying:

Policy discussions continue to centre on inflation, conveying confidence that anticipated monetary easing will heal the world’s economic woes.

Meanwhile, the pressing challenges of trade disruptions, climate change, low growth, underinvestment and inequalities are growing more serious.

The record number of people not working due to long-term sickness or disability shows that the UK needs a better sick pay system, says Amanda Walters, director of the Safe Sick Pay campaign.

Walters says:

“Government efforts to support people back into work, launched last year by Jeremy Hunt, have not done the job. Workers recovering from illness in some cases can be forced to leave employment as they can’t afford to pay the bills on £116.75 a week sick pay.

All political parties need to recognise that the right remedy is a sick pay system that at the very least covers the most essential household bills.”

Last summer, a coalition of charities and health experts warned that Britain’s sick pay system lags behind the rest of Europe:

Back at parliament, Bank of England deputy governor appointee Clare Lombardelli has rejected the idea that the UK’s fiscal watchdog, the OBR, should be abolished.

Former prime minister Liz Truss has argued that the OBR should be scrapped, claiming it is part of a failed economic model.

Lombardelli though, tells MPs that she’s a “big fan of the OBR”, having seen the benefit of its independent assessment when she worked at the Treasury.

She says:

It’s very valuable to have that independent expert judgement on fiscal policy.

Truss’s administration, ironically, proved this in September 2022 when it decided not to publish the OBR’s independent economic forecast alongside the mini-budget… which promptly spooked the bond market and drove the pound to a record low.

Truss has also called for Bank of England governor Andrew Bailey to resign over his response to the 2022 mini budget.

Q: Doesn’t that show that support for central bank independence is fading, asks Labour MP Angela Eagle.

Lombardelli insists there is “widespread support for this structure”, under which the BE has control of interest rates.

Lombardelli nimbly danced around a question about whether there should be an inquiry into the aftermath of the mini-budget, as Truss demands. Lombardelli points out that the events of September and October 2022 have been well examined by the Treasury committee already, with plenty of data about what happened.

Q: What message did the sacking of the permanent secretary of the Treasury, Tom Scholar, shortly before the catastrophic mini-budget give to the markets?

This is also “well-trodden territory”, Lombardelli demures, with a frown.

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Airline easyJet has announced that it is to suspend all flights to and from Tel Aviv until 27 October, following the Iranian missile and drone strike on Israel over the weekend.

In a statement, the carrier said:

“As a result of the continued evolving situation in Israel, easyJet has now taken the decision to suspend its flights to Tel Aviv for the remainder of the summer season until 27 October.

“Customers booked to fly on this route up to this date are being offered options including a full refund.”

On Monday, easyJet announced that it would look to resume flights to the Israeli city on Sunday after suspending flights after the attacks.

It comes just after easyJet resumed flights to Israel on 25 March after cancelling all flights following the 7 October Hamas attacks on the country.

The weekend saw a number of other major airlines suspend flights, including WizzAir, Air Canada, Delta, Iberia and Lufthansa.

Q: When do you expect interest rates to be cut in the UK, asks Thérèse Coffey MP.

Clare Lombardelli says her first MPC meeting will be in August [the decision is due at noon, Thursday 1st August].

She won’t put a date on when she expects UK rates to start falling.

But the issue to consider, she explains, is that while headline inflation is falling quite quickly, the factors adding to inflation are things that could be persistent, such as services prices and the labour market.

The falls in the inflation basket are changes to goods and energy prices, which drove inflation on the way up.

So the question is how persistent inflation will be, says Lombardelli, noting that today’s employment report showed wages are rising at 6%, much higher than the Bank’s target.

But on the other hand, economic activity is being hit by monetary policy.

So policymakers need to balance those two risks, Lombardelli explains, adding that the ‘direction of travel’ for European central banks is towards looser monetary policy.