Aurelia Butler

Chancellor Jeremy Hunt’s efforts to revitalise the UK economy have not been sufficient to raise it from near the bottom of the global league table this year, according to forecasts published by the IMF on Tuesday.In its twice-yearly World Economic Outlook, the fund predicted that the UK economy would shrink by 0.3 per cent in 2023, even after a significant upgrade to the forecast of a contraction of 0.6 per cent in January.With a worse outlook than Hunt expected even into the medium term, the IMF forecasts showed that the UK was set to miss his two main fiscal rules — to have both a falling public debt burden and borrowing below 3 per cent of gross domestic product by 2028.Among all other large advanced nations, only Germany was expected to shrink, with output in Europe’s largest economy forecast to slip by 0.1 per cent this year. Some smaller European economies were predicted to do worse than the UK this year because they suffered more from the surge in wholesale gas prices last year. They included Sweden, the Czech Republic and Estonia but the IMF expected all three to expand more in the rest of 2023, since their main problems hit at the end of 2022.

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Comparing the fourth quarter of 2023 with a year earlier, including only performance within 2023, the UK economy was expected to shrink 0.4 per cent, worse than any other advanced economy apart from Denmark.Russia’s growth forecast of 0.7 per cent in 2023 was stronger than that of Britain, but unlike in January, the IMF did not single out the UK for criticism. Pierre-Olivier Gourinchas, the fund’s chief economist, grouped it together with the eurozone as an area of the world where “the slowdown is concentrated”. Hunt will attend the IMF and World Bank spring meetings in Washington DC this week, where he is set to reiterate his view that “the declinists are wrong and the optimists are right” about the UK’s economic prospects. The fund’s forecasts do not support this view. In a nod to the recent banking turmoil, IMF analysts noted that the crisis that followed then chancellor Kwasi Kwarteng’s “mini” Budget last year were an example of the “significant vulnerabilities [that] exist both among banks and non banks” around the world.

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Hunt will meet other finance ministers and central bank governors at a time when he hopes the UK will be out of the spotlight. At the fund’s last gathering in October 2022, Kwarteng had to answer questions from peers about the dangers of contagion from the crisis sparked by his announcement of £45bn of unfunded tax cuts. Hunt will receive some reassurance from the IMF data. After predicting a contraction of 0.3 per cent this year, it expects growth of 1 per cent in 2024, rising to 1.5 per cent by 2028. This forecast was significantly weaker, however, than those drawn up by the Office for Budget Responsibility, the fiscal watchdog, which underpinned last month’s Budget.

The IMF’s more sober outlook was also reflected in its predictions for the public finances, which showed a deficit of 3.7 per cent of GDP by 2028 compared with the OBR’s forecast that it would fall to 1.7 per cent of GDP.That would push borrowing above Hunt’s commitment to keep it below 3 per cent of GDP.Higher borrowing in the IMF’s forecasts would also stop the public debt burden from falling. Instead of public sector net debt as a share of GDP falling by 2027-28, the IMF expects the net debt burden — measured slightly differently — to stabilise above 100 per cent of GDP. Responding to the IMF’s forecasts, Hunt said: “Thanks to the steps we have taken, the OBR says the UK will avoid recession, and our IMF growth forecasts have been upgraded by more than any other G7 country.“The IMF now say we are on the right track for economic growth. By sticking to the plan we will more than halve inflation this year, easing the pressure on everyone.” More

LONDON (Reuters) – The Norwegian crown is the worst-performing G10 currency so far in 2023, hurt by turmoil in the banking sector and a slowdown in central bank rate hikes just as U.S. and European peers raised theirs aggressively, but it may be due a respite.The crown hit a three-year low against the euro on Tuesday and a five-month low against the dollar in March, as the problems of the banking sector rattled high-beta currencies – those with the most risk.Norway is Europe’s largest oil and gas producer and its currency got a lift earlier this month after OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other partners, announced a surprise cut to crude output.Still, the crown has fallen by almost 8% against the dollar in 2023, compared with top performer sterling, which is up almost 3%. Going back a bit further the Nokkie, as it is popularly known among traders, is still the biggest laggard among currencies in the Group of 10 most developed economies in the last two years.It has weakened a whopping 10% against the euro this year, adding to a 5% tumble in 2022 as the crown failed to gain traction from a surge in oil and gas revenue last year. The scale of the crown’s struggle, and the Norwegian central bank’s renewed commitment to fight inflation with more rate hikes, along with the prospect of a weaker dollar this year could mean some respite lies ahead.”The NOK has massively sold off over the recent history and the Norges Bank is in a position where you can continue to raise rates without stressing the economy too much,” said Nick Rees, FX market analyst at Monex Europe.The Norges Bank, which was the first G10 central bank to start raising rates in September 2021, has admitted that slowing its rate increases when global peers were hiking aggressively has not helped the crown. Norwegian benchmark interest rates currently stand at 3.0%, compared with 5% in the United States and 3.0% in the euro zone, where the European Central Bank (ECB) started raising interest rates only in July.The Norges Bank is now promising at least a couple of rate hikes to lift its key policy rate to 3.5% by the summer after a 25-basis-point increase in March when it warned that the weak currency has worsened the inflation outlook by raising imported goods prices. Money markets show traders see maybe one more 25 bps hike from the Fed and a couple of similar hikes from the ECB this year.Goldman Sachs (NYSE:GS) and UBS said that the rising cost of borrowing would likely support the Norwegian crown. According to a Reuters poll of foreign exchange strategists, the crown will likely rise 6.5% versus the euro within a year, and almost 10% against the U.S. dollar.Nomura global FX strategists said that rate spreads still argue for a higher euro against the crown, but if oil prices stage a recovery, that could provide additional support.The Norwegian currency failed to hold onto the energy-driven gains last year amid historically large sovereign fund outflows “recycling” big oil receipts, analysts at Nomura said.One telling indicator is Norway’s terms of trade index, which reflects the ratio of exportable goods prices to importable goods prices. It fell to its lowest since the third quarter of 2021 in the final three months of 2022, in line with the 7% decline in the oil price and a 55% drop in benchmark European natural gas prices. “NOK should have been a lot stronger last year if its moves reflected the terms of trade,” Nomura’s Jordan Rochester said.The crown also took a hit last month from the central bank’s plans to exchange 1.5 billion crowns ($144 million) per day for foreign currency in April for the country’s sovereign wealth fund. Norges Bank said this was for fiscal reasons and was not currency intervention.But those daily sales are well down from the 4.3 billion crowns per day the central bank sold in October.     “Any budget surplus that was generated from the commodity exports was basically being neutralized by the Norges bank,” said Simon Harvey, head of FX analysis at Monex. “This mechanism, working against Norges Bank’s preference for stronger NOK, is starting to subside as well”. Much of the crown’s fate could also depend on what the U.S. central bank does. If the Fed stops hiking rates, this would likely boost global equities, which have a strong positive correlation to the Norwegian crown. More

(Reuters) – Italian government bonds, usually among the first to be dumped by panicky investors when a global crisis takes hold, have been absent from the maelstrom sparked by the recent banking turmoil — even outperforming European peers.Italy’s bonds, which carry yields almost double those of top-rated Germany as compensation for lending to one of the world’s most-indebted countries, are seen as a proxy for risk in Southern Europe. Yet, even as two U.S. banks collapsed and Credit Suisse was rescued, Italy’s brighter economic and political outlook proved a buffer from the storm. Yields on Italian 10-year bonds are down 60 basis points (bps) so far this year. Italian bonds have returned 4.1% year-to-date, compared to 2.9% on euro zone government bonds overall. The closely-watched gap over Germany, at 185 bps, is well below peaks seen during previous episodes of global stress and barely moved from early March levels. “The spread on Italy over Germany is not really factoring in any risk of something going wrong,” said Mike Riddell, senior fixed income portfolio manager at Allianz (ETR:ALVG) Global Investors.Investors initially worried about Prime Minister Giorgia Meloni’s far-right background and fiery rhetoric when her bloc won elections last September. But those concerns have eased as Meloni’s tone has moderated in office. Her budget, boosting spending and tax cuts, has received the green light from the European Union and the economy has fared better than expected, with a 2023 growth target expected to be revised to 1% from 0.6% previously.However, there are risks on the horizon. For starters, the growth outlook is turning and Italy plans to cut its 2024 growth forecast to 1.4% from a 1.9% November projection.The estimate is being cut as Rome is weighing the hit from rising interest rates and struggling to spend European Union post-COVID-19 recovery funds, which are key to its debt outlook.The EU has frozen an overdue 19-billion-euro ($20.50 billion) tranche, seeking clarification on efforts to meet the targets needed to unlock the funds — a development that could test investor sentiment. Significant delays in meeting the targets would hurt medium-term growth prospects, negatively impacting Italy’s credit rating, Scope Ratings said. More aggressive European Central Bank rate hikes to curb stubborn inflation could also renew concerns over the sustainability of Italy’s debt, which is the highest in the euro zone after Greece. Union Investment senior portfolio manager Martin Lenz said that if ECB rates rose to 4% from 3% now, above market expectations, and stayed there for a period, then such worries could return. And the banking turmoil has raised global recession risks. “With a recession looming, then I would expect spreads to be to be wider rather than tighter from here,” said Myles Bradshaw, head of global aggregate strategies at J.P. Morgan Asset Management, who is underweight Italian bonds. GRAPHIC – Italy’s spread holds tight in banking turmoil SIT TIGHT?For now, investors are sitting tight, with juicy yields on Italian bonds helping the market benefit from strong flows into global bonds and a broad rally in riskier assets. Confidence in the ECB’s anti-fragmentation tool, the Transmission Protection Instrument (TPI), is helping. Under the TPI, the ECB pledged to buy bonds from countries seeing spreads widen through no fault of their own. It is yet to be seen what conditions would prompt the ECB to step in. Italy’s bond spread ballooned to over 500 bps during the euro zone debt crisis in 2011 and the current stability of the gap is a welcome sign for policymakers”It’s quite a good sign for Europe generally, because banking stress normally then feeds into sovereign stress,” said JPMorgan (NYSE:JPM)’s Bradshaw.The gap blew out to over 300 bps at the height of the 2020 COVID-19 pandemic, fuelling worries about debt sustainability and the exposure of local banks to sovereign debt. It also surged ahead of the ECB’s first rate hike in a decade last July and again when Meloni’s bloc won elections, just as Britain’s budget and pension fund turmoil shook markets. Supporting the optimism around the government, helped by inflation, Italy’s public debt fell to around 145% of GDP in 2022, from roughly 155% in 2020, compared to pre-pandemic levels around 134%. “You don’t have the noise from the political side, no country specific reasons for concern at the moment,” said Oliver Eichmann, head of rates, fixed income EMEA at DWS, who favours shorter and medium-term Italian bonds. He added that debt sustainability was currently “not a big deal”. With 190 billion euros of funds at stake, Meloni’s government, in talks with Brussels, was also unlikely to risk a fallout with the EU, investors said. “There is…no reason at this stage for Italy to start to push back,” said Gareth Hill, fund manager at Royal London Asset Management, who halved his underweight position in Italian bonds in March, betting spreads won’t widen as much as last year. GRAPHIC – Italy’s debt-to-GDP ratiohttps://fingfx.thomsonreuters.com/gfx/mkt/egpbylajovq/italian%20debt%20to%20gdp.png More