In its latest ‘Global Economic Outlook’ (GEO), Fitch Ratings says the current soft patch in global economic growth is due to temporary factors – the negative impact of higher oil prices and also the Japanese natural disasters of March 2011 – and that the global economic recovery remains on track, albeit at an uneven pace from quarter to quarter and from country to country.
“The fragility of the global economic recovery has been highlighted by weak 1Q11 GDP [gross domestic product] growth outturns in several major economies, slowing global manufacturing and production indicators, and concerns about the effect of monetary policy tightening on key emerging markets,” said Maria Malas-Mroueh, director in Fitch’s sovereign team. “This moderation of growth combined with increased inflationary pressures raises a policy dilemma for central banks, particularly in the major advanced economies.”
US economic growth underperformed the agency’s expectations in 1Q11, largely due to a slump in domestic demand, in which consumption growth halved from the previous quarter, reflecting the effect of higher gasoline prices on US consumers. Fitch has not changed its outlook of a moderate US recovery, and has only revised down its 2011 growth projection (to 2.6% from 3%) to reflect the weaker-than-expected 1Q11 outturn.
In the direct aftermath of the Tohoku earthquake and tsunami of 11 March, 1Q11 GDP in Japan declined sharply, prompting the agency to revise down its 2011 full-year Japanese GDP forecast to 0.5% from 0.9%. The agency expects a V-shaped recovery to emerge during the second half of 2011, driven by a resumption of exports and restocking as supply disruptions are overcome and consumption growth is resumed. Fitch now projects GDP growth of 2.7% in 2012 (2.2% in the previous GEO).
In the UK, although temporary factors provided an additional headwind to the recovery, the weaker-than-expected 1Q11 performance, with consumption and investment both declining, served as a reminder of how anaemic the recovery is – with growth still weighed down by household and financial sector deleveraging. The agency has revised down 2011 UK GDP growth to 1.4% (1.6% previously), but maintained its 2012 growth projection at 1.7%.
Although the euro area sovereign debt crisis continued to dominate headlines, the region outperformed Fitch’s growth projections in 1Q11, pulled up by continued robust growth in Germany. The agency projects euro area GDP growth at 1.7% for 2011 (1.2% previously) and 1.8% for 2012 (unchanged).
Emerging market dynamism is still the main driver of the global recovery. However, evidence of deceleration from 2010 is emerging as monetary policy tightening takes hold in the context of rising inflation. Fitch has revised down its growth forecasts for the BRIC economies (Brazil, Russia, India and China) in 2011 to 6.9%, from 7.1% in the previous GEO. This reflects the projected moderation of growth in China, India, and Brazil from 2010 levels, while in Russia, Fitch forecasts annual real GDP growth to pick up slightly from its 2010 level, boosted by the increase in oil prices and a strengthening in private consumption. The agency expects the BRIC economies to maintain growth at 6.9% in the medium term.
In the context of growing concerns about the sustainability of Chinese economic growth, and further to the agency’s report, ‘The Impact of a China Slowdown on Global Credit Quality’, 29 November 2010, Fitch has analysed the potential impact of a material slowdown in the Chinese economy on the global economic recovery. In this hypothetical scenario, where GDP growth in China declines to around 4% in 2012 and 5% in 2013, the impact on the global economy would be severe, with countries in the Asia-Pacific region most directly affected through trade links with China.
GDP growth in the major advanced economies (MAEs) would also be affected, although the negative impact would be offset by lower demand for commodities, resulting in lower oil prices and declining inflationary pressures. Other likely effects of this hypothetical stress scenario include a dislocation of currency and debt markets and a retrenchment in credit availability, while existing global trade and capital imbalances are likely to be exacerbated.
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