Global Economic Outlook Remains Weak as Uncertainties Increase

In its latest quarterly Global Economic Outlook (GEO), Fitch Ratings forecasts the economic growth of major advanced economies (MAE) to slow to 1.3% in 2011 and remain weak at 1.2% in 2012, followed by only a modest acceleration to 1.9% in 2013.

Compared with the previous GEO in October, Fitch has revised down its GDP forecasts over the entire forecast horizon to 2013. The agency forecasts global growth, based on market exchange rates, at 2.4% for 2012 and 3.0% in 2013, compared with 2.7% and 3.1% previously.

“Fitch expects growth in the eurozone to weaken further to just 0.4% in 2012 owing to increased fiscal austerity measures and deteriorating financial market conditions feeding into tighter credit conditions for the broader economy,” said Gergely Kiss, director in Fitch’s sovereign team.

Mildly negative quarterly growth rates are likely over the next quarters in the eurozone and, among its four largest members, Fitch expects only Italian GDP to contract over 2012 as a whole, by 0.5%. “However, the outright contraction of the eurozone economy over 2012 is now a one-in-three probability,” added Kiss.

The recovery in the US will remain lacklustre in the short run with stronger growth momentum expected from 2H12 onwards, weighed down by the continued drag from the housing market as well as fiscal tightening equivalent to around 1% of GDP. In line with weak GDP growth in the eurozone, the economic outlook has also weakened in the UK, where Fitch has revised down its GDP growth forecasts again to just 0.7% in 2012 and 2.0% in 2013.

In contrast, Fitch expects the economic growth of BRIC countries will remain robust over the forecast horizon, at 6.3% in 2012 and 6.6% in 2013, well above MAE or global growth rates. Nevertheless, in line with the economic cycle of MAEs, China and Russia will slow in the coming years. Brazil and India have already experienced a sharp slowdown this year and are expected to regain some of the lost momentum by 2013.

In Fitch’s assessment downside risks dominate at this current juncture. In particular, financial tensions may intensify further in the eurozone. A special section of the GEO explores such an alternative scenario to Fitch’s baseline case and highlights the fragility of economic growth in the eurozone. Notwithstanding the short and long term decisions taken by the European Council on 9 December to resolve the euro crisis, market tension remains high.

Furthermore, progress on US fiscal consolidation or global imbalances could unwind in a disorderly fashion. Therefore, the probability of unfavourable outcomes is high and the risk of tail events, with severe consequences, has increased over the last months. Conversely, improvement in private sector balance sheets could generate stronger demand and a swift resolution of financial stress could boost confidence globally.

Following the two 25 bps European Central Bank (ECB) rate cuts under the new President, Mario Draghi, all major central banks are at record low interest rates. Against the weak global economic outlook Fitch does not expect monetary tightening until 2H12.


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