Currency watch: IMF projections leave us reaching for the strong stuff

The latest IMF projections for the world economy have grabbed the headlines this week as they have, needless to say, revised world growth lower once again.

While they said that the failure of Europe and the US to address fiscal issues was threatening the recovery, they also helped those opposed to austerity by saying that governments had “underestimated” the pain that the tightening process would cause.

Global growth will now only reach 3.6% in 2013 according to the latest figures, a fall from 3.9% previously. China’s growth numbers were cut by 0.2% this year and next to 7.8% and 8.2% respectively, with the UK taking a 0.6% hit from +0.4% to -0.2% through 2012.

This is not too worrying in our eyes; the 1.1% forecast next year is more so. The IMF especially advised the UK in the report to relax its austerity regime as it continues to weigh on growth.

Chancellor George Osborne’s speech to the Conservative party conference on Monday outlined the opposite and called for patience and to keep going forward with Plan A. A rowing back of this plan would increase the political pressure on the Coalition and would likely act as a sterling negative, in our opinion. The conference finished with a strong speech by Prime Minister David Cameron that further justified the Coalition’s decisions on welfare.

There are obviously significant risks to these latest projections from the IMF but they are hardly new – the most significant of these being the US “fiscal cliff”. On this side of the Atlantic there’s plenty more to worry about.

Further pressure has been piled on Spain via a downgrade of Spanish debt by Standard & Poors. It shouldn’t really come as a surprise to anyone given the level of concern and the subsequent lack of detail to amend the issues within the country’s economy. S&P has joined Moody’s in rating Spanish debt at the lowest “investment” grading they give i.e. one step above “junk”.

Critics of the move will point at the approval of the European Stability Mechanism last week as a reason why the Spanish economy is now more protected than before. I would only point to the confusion and uncertainty over how any country may be able to access said funds. This simply represents another ratchet to increase the pressure on the politicians within Spain, and the Eurozone as a whole. They simply must come to a decision about how much aid Spain needs and soon.

The prospects of recovery have hardly advanced this week. All the procrastination has indeed only lent itself to further uncertainty.

Jeremy Cook is chief economist at World First foreign exchange