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The New Guard: What Does the Recent IMF Downgrade Really Mean?

Historically, both the US and UK led the advanced economies’ contribution to global GDP output, but the latest forecasts put them squarely in the shadow of European counterparts.

Following the International Monetary Fund’s (IMF) downgrades of both the UK and the US economies this week, FXTM’s VP of Market Research and Corporate Development, Jameel Ahmad, asks whether the IMF’s latest projections suggest a ‘changing of the guard’ for the international economies.

On Monday, the latest IMF Report downgraded US GDP growth to 2.1% for the remainder of this year, cutting 2018 projections by 0.4% at the same time. It’s a damning analysis of President Trump’s fiscal success to date, particularly given that it was the largest downward revision of any major economy, matched only by South Africa and Brazil – both emerging economies currently facing huge political turmoil.

By contrast, the UK faired a little better, although it, too, was the subject of downward revisions. The British economy grew by a measly 0.2% in the first quarter to claim the ominous title of ‘the slowest-growing advanced economy in the world’. This likely prompted the IMF’s latest assessment, reducing 2017 growth projections by -0.3% to 1.7%. Unlike the US, however, 2018 estimates remained unchanged at 1.5%. These forecasts are a reflection on a Sterling that’s still struggling to successfully break above the 1.30 mark, and the weakened currency has contributed to a spike in inflation that continues to put pressure on wages.

Historically, both the US and UK led the advanced economies’ contribution to global GDP output, but these latest forecasts put them squarely in the shadow of European counterparts, many of whom are performing above expectations. Could this new development signal that the reign of both has come to an end?

President Trump’s perceived inability to implement his economic agenda was always seen as a risk to the USD and financial markets that bought into his legislative reforms, but we are now seeing the uncertainty play out in this week’s IMF forecasts. The ‘America First’ budget released in March surprised many, the proposed spending cuts on economic development and scientific infrastructure are likely to weaken GDP further. This administration’s dogged determination to sink Obamacare has also pushed tax reforms down the agenda; stalling another pivotal economic campaign pledge.

In the UK, Brexit is the obvious and looming threat to GDP. Confident projections for long-term growth are all but unheard of because they are reliant on the outcome of a negotiation process that has only just begun. A weaker than expected performance in Q1 is thought to be the reason behind this week’s downgrades, but any bad news from the negotiating table – or a renewed hard-line stance from Brussels – will likely spell trouble for the UK economy. Many financial firms have already committed to moving their European headquarters away from London, and major trading bodies are openly apprehensive about possible tariffs and free movement agreements. In light of this, this week’s IMF projections seem cautiously optimistic, but it is still a far cry from just three years ago, when the Washington-based organisation forecast that the UK would be the fastest growing major advanced economy of 2014.

Politics has dominated the headlines over the last year and is undoubtedly influencing, at least in part, the IMF’s US downgrades. In America, the latest forecasts will likely have little impact on the financial markets – if anything, it will simply augment current negative sentiment towards the dollar. However, the impact of IMF downgrades in the UK may be felt if investor confidence in the UK and Sterling wavers, especially given the uncertainty surrounding Brexit. What exactly the latest IMF data heralds for UK and US economies remains to be seen, but one thing is certain – both the White House and Downing Street have some work to do if either hopes to reclaim a leading role in global GDP output over the next five years.

Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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