Fitch Expects Uneven Global Economic Recovery

Global economic growth will pick up in 2015 and 2016, but risks are weighted to the downside, Fitch Ratings says in its latest Global Economic Outlook (GEO).

The contribution of major advanced economies (MAEs) to global expansion will gradually increase, while growth will remain subdued in emerging markets (EMs) after the cyclical trough this year.

The credit ratings agency’s (CRA) latest forecasts for world gross domestic product (GDP) growth (weighted at market exchange rates) are 2.6% in 2014, accelerating to 3% in 2015 and 3.1% 2016. The 2014 and 2015 forecasts are both 0.1 percentage points lower than in the June GEO. The downward revisions, similar to previous quarters, are mainly due to EMs.

For the US economy Fitch maintains its forecast of robust GDP growth of 3.1% in 2015 and 3% in 2016, up from 2.2% in 2014. The economy rebounded strongly in Q214 after a temporary setback in 1Q14. Private consumption growth is underpinned by improving household income, wealth and confidence. Investment should be supported by high corporate cash piles and profitability, low financing costs, rising confidence and capacity utilisation. Monetary policy remains highly accommodative and the drag from fiscal consolidation is significantly smaller than it was in 2013.

Fitch forecasts eurozone GDP growth of 0.9% in 2014, followed by 1.3% in 2015 and 1.5% in 2016, slightly weaker than in the June GEO. Output stagnated in 2Q14 following four quarters of insipid growth, due primarily to a sharp slowdown in Germany. Over the forecast horizon growth will be supported by the US and UK recoveries, euro depreciation, European Central Bank (ECB) policy loosening and an easing in the pace of fiscal consolidation.

However, faltering recent outturns suggest deleveraging and structural constraints remain formidable headwinds, eroding potential benefits from improving external conditions or policy stimulus. High unemployment will persist and remain above 11% until 2016.

The CRA’s base case is for eurozone inflation to be low at 0.5% in 2014, 1% in 2015 and 1.3% in 2016, but for protracted deflation to be avoided. However, current low inflation, weak demand, a decline in market inflation expectations, policy challenges and the potential for self-reinforcing dynamics make deflation a meaningful and rising risk.

Fitch forecasts EM growth to slow sharply from 4.7% in 2013 to 4% in 2014, before recovering somewhat in 2015-16. Looming US monetary policy tightening, geo-political tensions and lower commodity prices pose downside risks. Brazil is now in recession and Russia close to it. Fitch expects both to see only a subdued recovery in 2015 and 2016, underperforming most MAEs over the forecast period.


Slowdown in China

Fitch expects China’s GDP growth to moderate to 7.2% in 2014, 6.8% in 2015 and 6.5% in 2016 as it gradually rebalances while seeking to contain leverage. India will be the only BRIC country where growth picks up in 2014 to 5.6% and accelerates further to 6.5% in 2015 and 2016, owing to an expected improvement in the business environment.

The underlying momentum of the Japanese economy is uncertain after sharper-than-expected contraction in Q214. The CRA has revised down GDP growth to 1.4% in 2014, from 1.6% previously, and is maintaining its forecast of 1.3% for 2015 and 2016. Higher wage growth is central to Japan’s prospects of achieving sustainably higher real and nominal GDP growth.

Growth in the UK has been strong and broad-based. Fitch is maintaining its forecast that growth will slow from 3% in 2014 to 2.5% in 2015 and 2.3% in 2016, as it moves to its medium-term potential rate of 2%-2.25%. The base case is that nominal wage growth will pick up as the labour market slack is absorbed and the currently weak productivity growth will improve, in line with previous cyclical recoveries.

The coming quarters will see increasing divergence of monetary conditions in MAEs after six years of synchronised, ultra-loose monetary stance. Fitch expects the Fed and Bank of England (BoE) to start gradually tightening policy over the next few quarters. Meanwhile, the ECB announced further easing measures at its September meeting and the Bank of Japan is continuing with its qualitative and quantitative easing strategy. The ECB and Bank of Japan are likely to keep interest rates unchanged until at least 2016.

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