Grim IMF Report Downgrades Global GDP Growth Forecast, Pressurising GBP USD Rate, Euro Gains As ESM Is Unveiled

Modified: Tuesday, 9 October 2012 08:41 BST - Written by John Cameron

STORY LINK Grim IMF Report Downgrades Global GDP Growth Forecast, Pressurising GBP USD Rate, Euro Gains As ESM Is Unveiled

After months of political chicanery and manoeuvrings, yesterday’s session finally saw the official announcement from eurozone policymakers that the newly-minted European Stability Mechanism, (ESM), is finally ready to ‘go live’. The announcement came at the latest meeting of the eurogroup of eurozone Finance Ministers in Luxembourg and was given all the pomp and fanfare expected of a major euro-area announcement. The fund will have €500bn at its disposal when it is fully up to speed, the year after next, and is designed to replace the existing European Financial Stability Facility. Cynics will say that the fund will not be extensive enough, in its current forn at least, to tackle the euroland’s massive sovereign debt problem. However, investors took heart from the announcement, which in tandem with the ECB’s recent announcement of an open-ended bond purchase scheme for the region, provides tangible evidence that European policymakers are determined to tackle the difficulties which they face head-on. Improved euro-sentiment saw the GBP EUR exchange rate drop once again, to briefly trade below the 1.2350 level during the overnight session. If this afternoon’s NIESR UK GDP Growth estimate disappoints, as it so often has in recent months, then there could be further downside to come for the pair.

Elsewhere, the International Monetary Fund has published its latest evaluation of the status of the world economy in the last few hours, and it makes far from pleasant reading for investors. The report observes that the global economic recovery is ‘weakening’ and describes the possibility of a deterioration in worldwide economic activity as ‘considerable’. The publication goes on to downgrade previous growth forecasts for 2012 and beyond for almost every major developed economy and for almost every developing nation. The grim release from the IMF may serve to cause a renewed downward shift in risk sentiment, potentially providing safe-haven support for the US Dollar, which could see the GBP USD exchange rate drop back into the 1.50s later today.

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