Global economic outlook: Fitch Rating

The fragility of the global economic recovery has been highlighted by weak Q111 GDP 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. However, with much of the slowdown attributable to temporary factors — the negative impact of higher oil prices and the Japanese natural disasters in 2011 — Fitch Ratings maintains that the global economic recovery is on track, albeit at an uneven pace from quarter to quarter, and from country to country.

After having reached 3.8% in 2010, Fitch expects world growth to moderate to 3.1% in 2011 compared with 3.2% projected in the previous Global Economic Outlook (GEO; see under Related Research), and to rise to 3.4% in 2012 and 2013 (up from 3% projected in the previous GEO). Fitch has maintained its major advanced economy (MAE) growth projections for 2011 at 1.9%, as downward revisions in the US, Japan and UK were offset by an upward revision in the agency’s forecast for the euro area. The agency expects MAEs to register growth of 2.3% for 2012 and 2013.

US economic growth underperformed the agency’s expectations in Q111, 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–thanexpected Q111 outturn. It maintained its 2012 growth projection at 2.8%.

In the direct aftermath of the Tohoku earthquake and tsunami of 11 March, Japan was the second major underperformer, with Q111 GDP declining sharply by 0.9% qoq compared with an expected 0.2% increase. Fitch has revised down its 2011 fullyear 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 Q111 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 UK GDP growth to 1.4% (1.6% previously) for 2011, 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 Q111, still pulled up by 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.

The moderation of global economic recovery combined with increased inflationary pressures raises a policy dilemma for central banks. In light of the soft patch in the recovery, Fitch expects monetary policy to remain looser for longer, and projects the Fed to keep rates on hold until Q112, the European Central Bank (ECB) to raise rates again in Q311, and the Bank of England to begin raising rates in Q411.

In the context of growing concerns about the sustainability of Chinese economic growth, 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 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 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. See Appendix 1: The Risk of a China Slowdown for the Global Recovery.

This edition of the Global Economic Outlook (GEO) includes the extension of projections to 2013.

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