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November 2022 | Market update

Economic growth forecasts downgraded

Following forecasts that economic growth is likely to slow, financial markets rallied on hopes of an easing in the pace of central bank interest rate rises.

Global economic growth forecasts have been downgraded by the International Monetary Fund (IMF), which cites the war in Ukraine, soaring inflation and China’s economic slowdown as factors behind its decision. The IMF added that a third of the global economy could fall into recession by 2023.

Markets in Asia and Europe rallied in October – at one point the Hang Seng Index in Hong Kong rose by more than 5%. These gains came off the back of the rally in US markets, which remain hopeful of an easing in the pace of interest rate rises from central banks, despite higher than-expected inflation figures in September. Coupled with ongoing high inflation in the US, the country’s job market slowed slightly in September, leading experts to believe that both factors could prompt the Federal Reserve (Fed) to raise interest rates at its next meeting in November. However, there was good news for the US, as its economy rebounded in the third quarter having previously contracted in the first six months of the year.

UK reversal in fiscal policy and new PM

The pound gained ground against the dollar at the start of the month, following its plunge at the end of September in reaction to the government’s fiscal statement. The FTSE 100 also had its best performing day in early October since June.

This was then followed by the rollback of the government’s fiscal policies by new Chancellor Jeremy Hunt. The pound rallied further, seeing its best day since March 2020 against the US dollar.

However, inflation in the UK rose yet again in September, to 10.1%, as the cost-of-living crisis continued to hit households. Although the country’s unemployment rate fell in August, and wages increased, they still lag behind inflation. Data released also showed the UK’s economy shrinking by 0.3% in August compared with the previous month.

Political instability continued, with the resignation of Prime Minister Truss and the appointment of former Chancellor Rishi Sunak as the new PM. The news seemed to reassure markets with some hope that the turbulent situation would soon ease. The FTSE 100 Index closed higher and the pound made further gains on the dollar.

Germany’s economy unexpectedly grew by 0.3% in the third quarter, defying the government’s recession expectations for the time being. Rising inflation and supply chain constraints along with the energy crisis caused by the war in Ukraine are still issues affecting the euro zone, and the European Central Bank raised its key interest rate to 1.5%, with further rises likely.

Figure 1: Sterling’s ride against the dollar

UK political turmoil has had a dramatic affect on financial markets recently and the value of the pound has been volatile.


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