INSIGHTMOTORSPORTCONTACT
In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Global economy to strengthen this year, but growth to remain uneven states World Economic Forum
A new report released on Wednesday reveals that up to 82% of chief economists anticipate the global economy will either strengthen or remain stable this year. The World Economic Forum’s latest Chief Economists Outlook notes a significant drop in the percentage of economists forecasting a downturn, from 56% in January to just 17%.
Despite this optimism, economists remain wary of potential disruptions due to geopolitical and domestic political tensions. Nearly all respondents (97%) expect geopolitics to contribute to global economic volatility this year. Additionally, 83% predict domestic political issues will be a significant source of volatility in 2024, especially as nearly half the world’s population is set to vote.
Growth expectations have improved but are still uneven across different regions. The outlook for the United States has seen a notable increase, with 97% of chief economists now predicting moderate to strong growth, up from 59% in January.
Asian economies are also viewed positively, with all respondents forecasting at least moderate growth in South Asia, East Asia and the Pacific regions.
However, the expectations for China are slightly less optimistic. While three-quarters of economists foresee moderate growth, only 4% predict strong growth for the year. Europe’s outlook remains bleak, with almost 70%t of economists expecting weak growth for the rest of 2024. Other regions are expected to see moderate growth, with a slight improvement since the last survey.
The survey underscores the rising challenges faced by businesses and policymakers. According to 86% of respondents, the tension between political and economic dynamics will pose an increasing challenge this year, and 79% anticipate heightened complexity will impact decision-making.
Key factors influencing corporate decision-making include the global economy's overall health (cited by 100% of respondents), monetary policy (86%), financial markets (86%), labour market conditions (79%), geopolitics (86%), and domestic politics (71%). Interestingly, 73% of economists believe that companies’ growth objectives will drive decision-making, which is almost double the percentage who cited the importance of environmental and social goals (37%).
Most chief economists are hopeful about the prospects for a sustained global growth rebound, with nearly 70% expecting a return to 4 percent growth within the next five years (42% within three years). In high-income countries, growth is expected to be driven by technological transformation, artificial intelligence, and the green and energy transition. However, there is a divide in opinion regarding the impact of these factors on low-income economies.
IMF states UK interest rates should be cut
The International Monetary Fund (IMF) has recommended that the UK's interest rates be reduced to 3.5% by the end of next year.
This would require the Bank of England to potentially lower its key rate up to seven times from its current level of 5.25%.
This recommendation accompanies an upgraded growth forecast for the UK in 2024, though the IMF advises against further tax cuts.
The IMF noted that the UK economy is heading towards a ‘softer landing’ after last year's mild recession. It has marginally increased its growth forecast for this year from 0.5% to 0.7% and predicts a growth rate of 1.5% for 2025.
UK inflation is expected to fall close to the Bank of England's 2% target by Wednesday but may rise slightly over the rest of the year before stabilising at the target rate by early 2025, according to the IMF.
Regarding interest rate cuts, the IMF stressed the need for the Bank of England to balance the risk of cutting rates too quickly before inflation is under control with the risk of keeping rates too high, which could hinder growth.
The IMF UK mission chief, recommended reducing the current Bank rate from 5.25% to between 4.75% and 4.5% by the end of this year, with further reductions in 2025 potentially bringing the rate down to 3.5%.
The IMF also warned the next UK government of "difficult choices" regarding taxes and spending. It criticised the recent National Insurance cuts due to their significant cost.
The Fund anticipates that increased public service spending over the next five years will prevent the government from meeting its target of reducing debt as a share of national income. This results in an estimated gap of about 1% of UK GDP, or £30 billion annually. Given the current state of public finances, the IMF advised against additional tax cuts.
China’s factory activity shrinks in May amid uneven economic recovery
Factory activity in China slowed more than anticipated in May, reaching a three-month low. This decline highlights the significant structural challenges facing the world's second-largest economy, despite recent efforts by Beijing to support a recovery in the property market.
The official manufacturing purchasing managers’ index (PMI), which gauges factory owner sentiment, dropped to 49.5 in May from 50.4 in April, according to data from the National Bureau of Statistics. A PMI reading above 50 indicates expansion, while below 50 suggests ongoing contraction.
The subindex for new manufacturing export orders fell to 47.2 in May from 50.6 in April. Analysts attributed the disappointing PMI data mainly to a decrease in the output component, though new and export orders also weakened.
Beijing has been relying on export-led growth due to a rapid rebound in overseas demand. To combat prolonged weak domestic demand, leaders have introduced various property and trade policies aimed at achieving China’s GDP growth target of around 5%.
According to Capital Economics, Beijing’s supportive policies could help China regain momentum in its economic recovery.
China’s non-manufacturing PMI, which measures sentiment in the service and construction sectors, fell slightly to 51.1 in May from 51.2 in April, but remained in expansion for the fifth consecutive month. Within this PMI, the new-order sub index for construction fell to 44.1 in May from 45.3 in April, while the service sector business activity subindex dropped to 47.4 from 50.3.
Analysts noted that government bond issuance has been slow this year, contributing to a decline in new credit in April, the first such decline since 2005. As of May 24, local governments had issued 937.5 billion yuan (US$129 billion) in special purpose bonds, significantly less than the 1.86 trillion yuan issued by this time in 2023 and the 1.93 trillion yuan in 2022, according to Citic Futures. These bonds primarily fund key infrastructure projects, a key stabiliser for China’s economic growth.
China has taken vigorous steps to reverse the property downturn by cutting mortgage rates, encouraging inventory reduction, and providing 300 billion yuan (US$41.4 billion) in central bank funds to help local governments purchase inventories from developers.
Three of China’s four top-tier cities have introduced measures to stimulate the housing market, and around ten provincial cities, including Nanjing, Tianjin, and Chengdu, have adjusted property policies, such as lowering down-payment ratios and offering trade-in home subsidies.
