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OECD cuts UK growth forecasts; interest rates to remain higher for longer, Fed indicates – business live

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OECD chart: UK will have weakest growth across the G7 in 2025

The OECD’s forecasts suggest the UK will be the second-weakest growing advanced economy this year, and the slowest next year.

For 2024, Germany is expected to be the slowest G7 member with just 0.2% growth, behind the UK’s 0.4%, and Japan at 0.5%.

France and Italy (and the eurozone) are seen growing by 0.7% this year, while Canada is expected to grow by 1%, with the US (again) in the lead with 2.6% growth.

But for 2025, the UK slips to the back, with 1% growth, behind Germany at 1.1%.

The OECD also forecasts a very deep recession in Argentina, followed by a recovery in 2025, as president Javier Milei drives though his free market reform package.

The OECD says:

Developments continue to diverge across countries, with softer outcomes in many advanced economies, especially in Europe, offset by strong growth in the United States and many emerging market economies.

Photograph: OECD

OECD cuts UK growth forecast and warns of higher inflation than peers

Newsflash: Britain’s economy will grow slower this year and next than previously thought, the Organisation for Economic Co-operation and Development has warned.

New OECD forecasts also show the UK will suffer higher inflation than its peers.

The OECD cuts its British economic growth forecast to 0.4% for 2024 from 0.7% in February.

UK growth next year is expected to rise to 1.0%, compared with a previous forecast of 1.2%.

It means the OECD expects Britain’s economy will grow more slowly in 2025 than France or Germany.

Consumer prices are expected to rise more quickly in Britain during 2024 and 2025.

OECD SEES 2024 UK GROWTH OF 0.4% (0.7% PREVIOUSLY), 1% IN 2025 (1.2% PREVIOUSLY).

— FinancialJuice (@financialjuice) May 2, 2024

Looking more broadly, the OECD says global activity has proved surprisingly resilient so far.

Global GDP growth is projected to be 3.1% in 2024 and 3.2% in 2025, compared with 3.1% growth in 2023.

The OECD says:

Global growth in 2023 continued at an annual rate above 3%, despite the drag exerted by tighter financial conditions and other adverse factors, including Russia’s war of aggression against Ukraine and the evolving conflict in the Middle East.

Global GDP growth is projected at 3.1% in 2024 and 3.2% in 2025, little changed from the 3.1% in 2023. This is weaker than seen in the decade before the global financial crisis, but close to currently estimated potential growth rates in both advanced and emerging market economies.

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BNY Mellon: Fed sets the stage for a volatile summer

The Fed has set the stage for “a volatile summer ahead”, says BNY Mellon’s macro strategist John Velis.

He told clients:

The outcome of this week’s Federal Open Market Committee meeting turned out to be less hawkish than we – and apparently markets – expected.

The key phrase in the statement was unchanged, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”, so the Fed continues to affirm its bias towards easing policy.

Velis added:

To us, this decision to hold, and to still view an eventual cut as the most likely future move, sets the stage for a volatile summer ahead.

Effectively, the Fed is data dependent, meaning every data release – especially as relates to inflation – acts as a referendum on where the Fed will go (or not go). There hasn’t been a lot to suggest inflation is going to moderate.

One of Jerome Powell’s predecessors, Alan Greenspan, once remarked that “If I seem unduly clear to you, you must have misunderstood what I said.”

And today, investors seem to broadly agree that the Fed wasn’t as hawkish as it could have been…

Goldman Sachs are in the dovish camp – they still expect two rate cuts this year:

Jim Reid, strategist at Deutsche Bank, says “it’s hard to say it was a dovish meeting”:

The main flashes from the Fed last night was that while the FOMC made several hawkish tweaks, Powell signalled that rate hikes remained unlikely and the Fed announced a slightly-larger-than-expected slowing of QT.

It’s hard to say it was a dovish meeting but given the recent inflation prints it could have been a lot more hawkish.

Kyle Rodda, analyst at capital.com, argues that the Fed’s tone was “less-hawkish-than-feared”.

Ultimately, the bar was set high for a hawkish surprise last night, and the central bank did not attempt to leap it, striking an overall neutral tone and leading to a brief flurry of bullishness in the market.

Slightly more than one cut was baked into the futures curve going into the meeting, with the odds of another increasing at the margins after last night’s meeting. As a result, yields edged lower, and the US Dollar dropped, with gold also rallying.

Anger as Shell beats profit forecasts

Energy giant Shell has beaten City expectations this morning by reporting adjusted earnings of $7.7bn for the first quarter of 2024.

Shell’s earnings were lower than a year ago – it made a bumper $9.6bn in Q1 2023 – but well above analyst predictions of $6.5bn.

Shareholders will – again – benefit, with Shell announcing a new $3.5bn share buyback programme this morning.

CEO Wael Sawan says:

“Shell delivered another quarter of strong operational and financial performance, demonstrating our continued focus on delivering more value with less emissions,”

Alexander Kirk, fossil fuel campaigner at Global Witness, says such huge profits show the energy system simply doesn’t work:

“Shell continuing to rake in huge sums of money shows us that huge polluter profits were not a one-off but are the twisted reality of an energy system that benefits climate-wrecking companies to the cost of everyone else.”

“Companies like Shell saw record profits while the energy crisis dragged millions of families into poverty through unaffordable energy bills. Meanwhile fossil fuel giants fought hard against paying more tax.

“This is the sad irony of the global energy system in which those causing chaos are the ones getting rich. This spiral won’t stop until we make the urgent switch to a fairer renewable energy system that puts both people and planet first.”

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Two UK rate cuts in 2024 are not fully priced in

Back in 1971, the US Treasury Secretary John Connally caused a stir by declaring that “The dollar is our currency, but it’s your problem.”

And the Federal Reserve’s stance on interest rate also has global implications. If US interest rates stay higher for longer, it’s hard for other central banks around the world to cut interest rates without weakening their currencies against the greenback (which is inflationary).

Investors have been cutting back on their forecasts for early cuts to UK interest rates.

Currently, the money markets are pricing in around 42 basis points of cuts to UK rates this – that means one quarter point (25bp) cut is certain and a second is possible.

In early trading this morning, the first Bank of England rate cut is fully priced in for September, tho there’s a greater than evens chance it will happen in August.

Introduction: Fed chair chair Powell signals interest rates will remain higher for longer

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Hopes of early interest rate cuts are fading today after America’s central bank left borrowing costs on hold last night and chafed at the ‘lack of further progress’ on inflation.

Last night, the Federal Reserve left its policy rate unchanged last night, as expected, given inflation rose back to 3.5% in March – further from its 2% target.

The Fed was clear that recent data has not given it the confidence it needs that inflation is moving sustainably toward target,

Federal Reserve chair Jerome Powell told reporters last night:

It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate for as long as appropriate.

Powell added that the Fed was “prepared to respond” if the jobs market weakened unexpectedly.

The Fed chair indicated he simply didn’t know when interest rate cuts will be justified, but felt it unlikely that the Fed’s next move would be to hike rates.

FED’S POWELL: I DON’T HAVE GREAT CONFIDENCE EITHER WAY ON WHETHER THERE WILL BE RATE CUTS THIS YEAR.

— FinancialJuice (@financialjuice) May 1, 2024

The Fed did make one change – it slowed the pace of its quantitative tightening programme, under which it sells bonds bought under its stimulus programmes.

After a volatile session on Wall Streer, the S&P 500 index closed down 0.35%.

Sneak Peek- April 2024 Newsletter: US equity markets corrected significantly last month. Expectations of multiple rate cuts have faded as inflation remains high. pic.twitter.com/IvSufw8yXS

— Gaurav Goel (@megauravgoel) May 2, 2024

Powell’s message was that current policy was in a good place, explains ING’s economics team. They told clients this morning:

At the press conference, Powell reiterated that he feels monetary policy is “restrictive” and that an interest rate hike is “unlikely”, but that will be up to the data to determine – he would need “persuasive evidence” that monetary policy isn’t tight enough.

He then repeated that 16 April comment that gaining confidence inflation is coming down and they can cut interest rates is taking “longer than thought” and he doesn’t know if it will be achieved this year. However, with inflation having moved below 3% he argues that the employment goal of the Fed comes back into focus.

He says the current policy stance “is in a good place” and in response to a question of a risk of stagflation – weakening growth and high inflation – he doesn’t see “the Stag or the Flation”.

US interest rates are currently set at a 5.25-5.5% range.

According to the CME Fedwatch tool, there’s now a 31% chance that the Fed will have cut interest rates twice by the end of this year – to 4.75%-5% – and a 38% chance of only one rate cut.

At the start of this year, investors expected six quarter-point cuts, but persistent inflation has dampened those expectations.

The agenda

  • 8am BST: OECD to publish half yearly economic outlook

  • 9am BST: Eurozone manufacturing PMI for April

  • 9.30am BST: Hong Kong’s GDP report for Q1 2024

  • 1.30pm BST: US trade balance for March

  • 1.30pm BST: US weekly jobless data

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