IMF warns world economy may soon be on the cusp of recession – as it happened

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Key events

Closing post:

Time to wrap up…. here are today’s main stories, first on the IMF’s growth downgrades:

…the UK’s travel disruption…

…inflation and the rising cost of living…

…the energy crisis in Europe, and the UK….

…and the ongoing impact of Brexit on the UK economy:

We’ll be back tomorrow…. GW

Rachel Reeves MP, Labour’s Shadow Chancellor, has responded to the IMF forecast that the UK is set for the slowest growth of G7 economies next year (see here for details):

“Today’s forecast underlines yet again how 12 years of Conservative governments have left our economy weaker than our competitors and less resilient.

“To give Britain the fresh start it needs, we need a new approach – one based on growth, because low growth economies cannot rise to meet the challenges of the future.

“The choice at the next election will be between Labour growth and Tory stagnation.

“With our Climate Investment Pledge and plan to buy, make and sell more in Britain, Labour will deliver the strong, secure and fair growth our country needs.”

Shopify is laying off roughly 1,000 workers, or around 10% of its global workforce.

The Canadian e-commerce firm, which provides services to help companies sell online, is cutting staff after realising the pandemic e-commerce boom was fading as consumers cut back.

CNBC has the details:

In a memo to staff, CEO Tobi Lutke acknowledged he had misjudged how long the pandemic-driven e-commerce boom would last, and amid a broader pullback in online spending, Shopify would move to cut a number of roles.

The cuts will affect all of Shopify’s divisions, though most will occur in recruiting, support, and sales, and “across the company” it is eliminating “over-specialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products,” Lutke said in the memo.

A harbinger of things to come for DTC brands: “Mr. Lütke said he had expected that surging e-commerce sales growth would last past the Covid-19 pandemic’s ebb. ‘It’s now clear that bet didn’t pay off,'” https://t.co/QKppyESJij

— Anna Hensel 👩‍💻 (@ahhensel) July 26, 2022

Shares in Shopify have dropped 15% in early trading.

American consumer confidence has fallen for the third month running as inflation hits US households.

The decline will bolster fears that the US economy is weakening.

Lynn Franco, Senior Director of Economic Indicators at The Conference Board, which conducts the survey, explains:

“The decrease was driven primarily by a decline in the Present Situation Index—a sign growth has slowed at the start of Q3. The Expectations Index held relatively steady, but remained well below a reading of 80, suggesting recession risks persist.

Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers.”

US house price growth has slowed, a sign rising interest rates could be taking some heat out of a market that has been red-hot for many months.

Home prices in May were 19.7% higher compared with the same month last year, according to the S&P CoreLogic Case-Shiller National Home Price Index.

That’s a drop in April’s 20.6%, and the second month of slower increases, as the housing market cools due to higher mortgage rates and increasing concern over inflation.

Mortgage affordability in the US has become increasingly stretched as the Federal Reserve raises interest rates sharply, with another steep increase of 75 basis points expected tomorrow.

As the Daily Telegraph explains today:

The average rate of a 30-year fixed-rate mortgage in the US, the most popular length of loan in the country, has doubled in the past year.

New borrowers paid an average of 2.78pc in July 2021, but this has risen to 5.54pc this month, according to US lender Freddie Mac.

Longer fixed mortgage deals mean many US housebuyers could be insulated from this (although it will scupper some remorgaging plans).

In the UK, though, mortgage owners are usually on shorter deals, so would be hit sooner by Bank of England rate rises.

If interest rates rocket at the same speed as in the US many won’t be able to afford the higher property prices currently touted whilst accompanied by higher rates. The million dollar question is how long will they stay there ⁦@R_A_Mortimerhttps://t.co/5rpJoaUg30

— Emma Fildes (@emmafildes) July 26, 2022

Updated at 13.19 EDT

Back in the financial markets, shares in Walmart have dropped 8% after it issued its second profit warning in 10 weeks last night.

The hypermarket titan reported that inflation was hitting price-sensitive consumers, as soaring prices left people with less to spend.

Shares in rival retailers are also sliding:

Retail bloodbath at the mall (& online!) this morning, as Walmart sends shockwaves across the industry:

Revolve & ThredUp -10%
American Eagle -9%
Victoria’s Secret, Gap & Nordstrom -7%
Macy’s & Kohl’s -6%
Wayfair & Urban Outfitters also about -6%

— Lauren Thomas (@laurenthomas) July 26, 2022

IMF cuts UK growth forecast for 2023

The UK’s economy is expected to lag behind other major economies in 2023, as the IMF cuts its growth forecast.

UK GDP is now only forecast to rise by 0.5% next year, a very weak performance, and expected to be the weakest in the G7. Only Russia is expected to do even worse out of major rivals:

New IMF forecasts downgrade UK 2023 outlook again, keeping it at the bottom of the pack of major economies (bar Russia)
GDP now seen growing by just 0.5% next year, down from April’s 1.2% forecast and 2.3% forecast in January pic.twitter.com/RbliUO4G9J

— David Milliken (@david_milliken) July 26, 2022

Updated at 09.44 EDT

IMF growth projections

The IMF cas cut China’s growth forecast this year to 3.3%, from 4,4% back in April, citing the impact of Covid-10 lockdowns and the crisis in its property sector.

The eurozone’s 2022 growth forecast is cut to 2.6%, from 2.8%.

The US is now expected to grow just 2.3% this year, down from 3.7%.

Russia is expected to shrink 6% this year, and another 3.5% in 2023, while the Ukraine’s economy is expected to contract by 45% in the war, with ‘high uncertainty’ over its outlook.

IMF Growth Projections: 2022

USA🇺🇸: 2.3%
Germany🇩🇪: 1.2%
France🇫🇷: 2.3%
Italy🇮🇹: 3.0%
Spain🇪🇸: 4.0%
Japan🇯🇵: 1.7%
UK🇬🇧: 3.2%
Canada🇨🇦: 3.4%
China🇨🇳: 3.3%
India🇮🇳: 7.4%
Russia🇷🇺: -6.0%
Brazil🇧🇷: 1.7%
Mexico🇲🇽: 2.4%
KSA🇸🇦: 7.6%
Nigeria🇳🇬: 3.4%
RSA🇿🇦: 2.3%https://t.co/ldMsaieJUU pic.twitter.com/Ip06Wct3s4

— IMF (@IMFNews) July 26, 2022

Risks to the outlook “overwhelmingly tilted to the downside”:

The IMF also gives a stark warning that economic prospects could be much worse than its new forecasts.

The risks to the outlook are “overwhelmingly tilted to the downside”, it says, picking out six key threats:

  • The war in Ukraine could lead to a sudden stop of European gas flows from Russia
  • Inflation could remain stubbornly high if labor markets remain overly tight or inflation expectations de-anchor, or disinflation proves more costly than expected
  • Tighter global financial conditions could induce a surge in debt distress in emerging market and developing economies
  • Renewed COVID-19 outbreaks and lockdowns might further suppress China’s growth
  • Rising food and energy prices could cause widespread food insecurity and social unrest
  • Geopolitical fragmentation might impede global trade and cooperation.

The Fund warns that if some of these risks emerge– such as a full shutdown of Russian gas to Europe — inflation will surge even higher, and growth will be even weaker:

In a plausible alternative scenario where some of these risks materialize, including a full shutdown of Russian gas flows to Europe, inflation will rise and global growth decelerate further to about 2.6 percent this year and 2 percent next year—a pace that growth has fallen below just five times since 1970.

Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world.

⚠️ IMF Says Under Alternative Scenario, United States And Europe Would See Growth Falling To Near Zero Due To Increased Inflation, Tighter Financial Conditions

— PiQ  (@PriapusIQ) July 26, 2022

Updated at 09.43 EDT

IMF hikes inflation forecast

Despite economic activity slowing, the IMF has lifted its global inflation forecasts as consumers are hit by rising food and energy prices.

Inflation this year is anticipated to rise to 6.6% in advanced economies, an upward revision of 0.9 percentage points, and jump to 9.5% in developing economies, 0.8 percentage points higher than before

The IMF warns that inflation will remain elevated for longer, with Pierre-Olivier Gourinchas adding:

Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.

The IMF’s new inflation forecasts Photograph: IMF

IMF cuts global growth forecasts as outlook darkens

The world may soon be teetering on the edge of a global recession, only two years after the last one, warns the International Monetary Fund as it cuts its growth forecasts.

In its latest World Economic Outlook, the IMF warns that growth is stalling in the world’s three largest economies — the United States, China and the euro area.

The Fund has cut its growth forecast for his year to 3.2%, down from 3.6% previously, and to just 2.9% in 2023, down from 3.6%.

In a blog post explaining the move, IMF economic counsellor Pierre-Olivier Gourinchas warns that “the outlook has darkened significantly since April”, with the global economy expected to have contracted in the last quarter.

Gourinchas says:

The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook.

Many of the downside risks flagged in our April World Economic Outlook have begun to materialize. Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions.

China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year .

Fizzy drinks maker Coca-Cola has swelled its sales thanks to price increases.

Coca-Cola posted higher-than-expected sales in the second quarter, due to price increases and rising demand from restaurants and other venues.

Organic revenues grew 16% in the last quarter, ahead of Wall Street forecasts, as customer kept buying despite Coca-Cola lifting prices by 12%.

The soft drinks giant now sees organic revenue growth of 12% to 13% for the full year, up from its previous estimate of 7% to 8%.

CEO James Quincey said:

Our results this quarter reflect the agility of our business, the strength of our streamlined portfolio of brands, and the actions we’ve taken to execute for growth in the face of challenges in the operating and macroeconomic environment.

For the usual folks who pipe up saying it’s all price Coke grew volume an incredible 8% on top of equally incredible 12% pricing. US volume +2% despite 10% pricing. Europe pricing +21% as tourism & on-premise bounce back & volume still +6%. $KO $PEP $XLP $XLY https://t.co/ERQrZIUb4w

— Rahul Sharma (@Retail_Guru) July 26, 2022

US natural gas price are also rising today, pushed up by increased energy demands for air conditioning in the hot weather, as well as European supply shortfalls.

Russia is blaming technical problems for the cuts to European gas supplies which kick in tomorrow.

The Kremlin says one repaired gas turbine for Nord Stream 1, Russia’s biggest gas pipeline to Europe, had not yet arrived after maintenance in Canada and that a second turbine was showing defects.

Kremlin spokesman Dmitry Peskov said that the sanctions against Russia had critically complicated the work of Nord Stream 1, which is reducing gas supplies to Europe to just 20% of its capacity amid maintenance, Reuters reports.

This chart highlights how European gas prices have jumped:

CHART OF THE DAY: European natural gas benchmark contract (Dutch TTF) rises above €190 per MWh, highest since early March (white line).

Importantly, look at the monthly averages (pink stepped line), showing that **sustained** prices are already at a record high | #EnergyCrisis pic.twitter.com/Z6WhKZKySi

— Javier Blas (@JavierBlas) July 26, 2022

Updated at 07.58 EDT

Gas price jump on Russia supply fears

European Union countries have approved a weakened emergency plan to curb their gas demand on Tuesday, just as fears over disruption to Russian supplies sends wholesale prices soaring.

At a meeting in Brussels, energy ministers approved a proposal for all EU countries to voluntarily cut gas use by 15% from August to March.

The cuts could be made binding in a supply emergency, but countries have agreed to exempt numerous countries and industries.

Russia’s Gazprom is due to cut gas flows to Europe tomorrow, to just 20% of normal capacity through the Nord Stream 1 pipeline, which will put more pressure on supplies.

With fears of a shutoff rising, the price of gas for delivery in the UK next month has jumped 11% today to 356p per therm, the highest since March, early in the Ukraine war.

GERMAN ENERGY REGULATOR: WHOLESALE PRICES HAVE RISEN SIGNIFICANTLY AS A RESULT OF THE REDUCTION IN DELIVERIES ANNOUNCED FOR WEDNESDAY

— First Squawk (@FirstSquawk) July 26, 2022

Updated at 08.02 EDT