Newsflash: The International Monetary Fund has cut its growth forecasts for the global economy, blaming the US-China trade war and Brexit uncertainty.

The Fund now expects the world economy to only grow by 3.2% this year, down from a previous forecast of 3.3%. It expects growth of 3.5% in 2020, down from 3.6% before.

In its latest World Economic Outlook, just released, the Fund says:

Risks to the forecast are mainly to the downside.

They include further trade and technology tensions that dent sentiment and slow investment; a protracted increase in risk aversion that exposes the financial vulnerabilities continuing to accumulate after years of low interest rates; and mounting disinflationary pressures that increase debt service difficulties, constrain monetary policy space to counter downturns, and make adverse shocks more persistent than normal.

The Fund also warns that trade conflicts are hurting:

Multilateral and national policy actions are vital to place global growth on a stronger footing.

The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements (including between the United Kingdom and the European Union and the free trade area encompassing Canada, Mexico, and the United States).

Newsflash: Rating agency Moody’s has warned that Boris Johnson’s win increases the risk of a no-deal Brexit.

In a new report to investors, Moody’s also warns that crashing out of the EU would caused “significant” damage to Britain’s credit rating, and that of major companies (such as UK banks, I suspect).

Moody’s managing director Colin Ellis says Johnson’s victory makes a “sustainable compromise” between London and Brussels less likely.

“With the election of Mr Johnson, the likelihood of a sustainable compromise appears lower than before...Our view remains that a no-deal Brexit would have significantly negative credit effects for the UK sovereign and related issuers.”

Moody’s currently ranks the UK’s debt as Aa2, the third-highest rating.

The slump in UK factory orders underlines the challenges facing Boris Johnson, newly installed as the new leader of the Conservative Party (and prime minister by tomorrow).

Several business groups have rushed to release advice for the new PM -- keen to squeeze into his in-tray.

Carolyn Fairbairn, CBI Director-General, says Johnson needs to get a Brexit deal soon, to support the economy:

“Business needs three things in the first 100 days. A Brexit deal that unlocks confidence; clear signals the UK is open for business; and a truly pro-enterprise vision for our country.

“On Brexit, the new Prime Minister must not underestimate the benefits of a good deal. It will unlock new investment and confidence in factories and boardrooms across the country. Business will back you across Europe to help get there.

“Early signals back home also matter. From a new immigration system to green-lighting major infrastructure, there is no time to waste.”

Edwin Morgan, Interim Director General at the Institute of Directors, has a five-point plan for the new PM

• Provide financial support for SMEs to prepare for and adjust to Brexit, for instance through a Brexit planning voucher system offering grants to help smaller firms access the specialist professional and/or legal help they often need.
• Reform the skills system, introducing a wider range of courses under the flagship Apprenticeship Levy, while introducing new ways to incentivise lifelong learning through the tax system.
• Incentivise business investment by improving EIS and SEIS reliefs and creating a new Enhanced Capital Allowance for productivity-enhancing spending.
• Reduce the burden of business rates by removing the impact of investment in improvements, extending reliefs, and conducting more frequent revaluations.
• Supercharge regional growth by providing more local control of skills policy, piloting regional variances and exploring long-term investment vehicles such as urban wealth funds.

Miles Celic, chief executive officer of TheCityUK, says Johnson must lift the threat of a no-deal Brexit:

“We congratulate Boris Johnson. He becomes Prime Minister at a pivotal time in our country’s history. He must now move swiftly to set out his plans for the road ahead. Ongoing Brexit uncertainty is depressing business activity, but the financial and related professional services industry remains very clear that a no-deal Brexit is still the worst of all outcomes.

We hope the new Prime Minister can find an economically viable way through the ongoing political impasse in Parliament and with the EU27.

UK factories are struggling because the boost from pre-Brexit panic stockpiling earlier this year has faded.

Rain Newton-Smith, CBI Chief Economist, explains:

“As the tailwind from stockpiling weakens, clouds are gathering above the manufacturing sector. It’s being hit by the double-blow of Brexit uncertainty and slower global growth.

“With orders, employment, investment, output and business optimism all deteriorating among manufacturers, it’s crucial for the new Prime Minister to secure a Brexit deal ahead of the October deadline. And get on with pressing domestic priorities from improving our infrastructure to fixing the apprenticeship levy.

“This will allow firms to focus on investing in new technology and tackling the skill shortages that plague this sector.”

OUCH! UK factory orders have fallen at the fastest pace in a decade, as Brexit uncertainty continues to hurt British manufacturing.

A new survey from the CBI found that UK manufacturing output fell in the three months to July, for the first time since March 2016.

The business group warns that “storm clouds” are gathering over the economy, with confidence waning and order books shrinking.

The rather echoes Michael Saunders’ concerns over the economy, and may intensify concerns that Britain is heading into recession.

The CBI interviewed 291 manufacturing firms, and found:

• Total new orders fell at the quickest pace since January 2012, driven by the fastest falls in domestic and export orders since the financial crisis.
• Business sentiment deteriorated at the quickest rate since July 2016 (just after the EU referendum), while investment intentions worsened relative to last quarter.
• Stockpiling activities slowed noticeably from last quarter, when stocks of raw materials, work in progress, and finished goods all grew at survey record highs.

More to follow...

Boom! One of the Bank of England’s most hawkish policymakers has warned that the UK economy looks weak.

Michael Saunders told Bloomberg that it was very uncertain that Britain would leave the EU smoothly (as the Bank’s own forecasts assume). That’s a signal that Saunders might not vote for higher borrowing costs soon.

Saunders explained:

The economy right now is clearly not overheating -- the underlying pace of growth, stripping out all of the funny effects, inventories, car shutdowns and so forth, is weak and below trend.”

He also hinted that he wouldn’t be swayed to vote for higher interest rates, just because the BoE’s own forecasts suggested they were necessary to curb inflation.

“The link from the forecast to my actual vote [last time the MPC met] was quite loose.”

This is quite a dovish twist from Saunders. Last month he warned that the Bank risked lifting rates too slowly, and shouldn’t wait until Brexit uncertainty had been resolved.

Clearly the facts have changed -- with growth continuing to slow (Britain could already be entering recession), and markets anticipating rate cuts in the US and fresh stimulus in Europe.

Many investors expect the BoE to slash interest rates in a no-deal scenario, but Saunders isn’t committing himself, saying:

“It’s hard to know how it would play out with any certainty....I wouldn’t want to give a strong steer now as to which way policy would go.”

Nancy Pelosi, speaker of the House, has admitted that avoiding a stock market crash was a key factor behind the budget deal hammered out yesterday.

CNN explains:

In a brief interview Monday evening, Pelosi said two factors above all played a critical role in her successful behind-the-scenes negotiations with [Treasury secretary] Mnuchin: avoiding a stock market collapse and the fiscal fallout from failing to raise the debt ceiling.

“The debt ceiling and the stock market were always two major motivators for him to try and clear the way,” Pelosi told CNN. “We avoided sequestration and for the moment avoided a shutdown. For federal workers, that was very important.”

It’s looking like mission accomplished so far, with markets in Asia and Europe both gaining ground today:

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

It’s a beautiful day in the City of London, with many investors in a sunnier mood as they settle down at their computers too.

Signs of progress on two bugbears -- the US debt ceiling, and the US-China trade war – is cheering the markets.

Overnight, President Donald Trump reached a deal with Congress that will remove the threat of a new fiscal crisis until at least 2021. The plan clears the way for more US spending, removing the danger of a government shutdown because the national debt had hit the current limit.

Trump declared that the deal was a “real compromise”. Investors will be relieved, as it removes the risk that America could default on its debts (even though it can print all the dollars it ever needs).

It also defuses one potential landmine in the way of Trump’s re-election bid.

Adam Cole of RBC Capital Markets points out the deal has strengthened the US dollar.

The deal raises the debt ceiling to mid-2021... and alleviates one of the risks overhanging policy in the US.

In another welcome sign of progress, US officials are expected to head back to China next week for new talks over the trade war.

The South China Post reported that America’s trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will meet Vice-Premier Liu He. The meeting comes as the two sides appear to thaw their positions.

The US has recently offered exemptions to 110 Chinese products, including medical equipment and key electronic components, from import tariffs. China has also offered an olive branch, allowing several companies to buy US agricultural products without tariffs.

This is giving stocks a lift, particularly technology firms who are vulnerable to the trade conflict.

Asian markets have rallied, with Japan’s Nikkei gaining 1% and China’s Shanghai Composite up 0.5%. European markets are also expected to rise, with the UK FTSE 100 gaining 0.5% in early trading.

Also coming up today

Investors are adopting a brace position ahead of the results of the Conservative Party leadership election, likely to confirm Boris Johnson will become Britain’s next prime minister.

The prospect of a no-deal Brexit will keep the pound under pressure, while Johnson’s promise of tax cuts and higher spending could sway the bond market (as he’ll have to borrow to pay for it).

The International Monetary Fund will release its latest assessment of the world economy, forecasting how issues such as the US-China trade war and Brexit will hurt growth.

In the UK, the CBI’s monthly manufacturing survey is likely to show weak confidence among UK industrial firms.

The agenda

• 11am BST: CBI industrial trends report for June
• 2pm BST: IMF releases latest World Economic Outlook