Emerging market strains weigh on growth outlook

Fitch Ratings says in its newly published Global Economic Outlook that it expects the global economy to strengthen gradually. 

The ratings agency expects improvements in the second half of 2013 and beyond as the US gathers steam and the Eurozone approaches a cyclical turning point. However, the agency has cut its 2013-2014 growth forecasts for all four of the BRIC nations. Its latest forecasts for world gross domestic product growth are 2.4 per cent in 2013, 3.1 per cent in 2014 and 3.2 per cent in 2015 (weighted at market exchange rates). 

For the major advanced economies, Fitch forecasts weak growth of just 0.9 per cent in 2013 before accelerating to 1.9 per cent in 2014 and 2 per cent in 2015. 

“Several of the largest emerging markets are experiencing strains from spill-overs from advanced economies and China, difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks. Therefore growth differentials will narrow between advanced economies and emerging markets over the forecast horizon,” says Gergely Kiss, director in Fitch’s Sovereign team. Nonetheless emerging market growth will continue to far outstrip the pace in major advanced economies and to strengthen from 4.8 per cent in 2013 to 5.2 per cent in 2014-2015. 

Fitch estimates that 2012-2013 will see the second weakest BRICs’ growth after 2009 since the Russian crisis in 1998. It forecasts China to grow by 7.5 per cent in 2013 and 2014, followed by 7 per cent in 2015. The agency has also cut its growth forecasts for other major emerging markets. Downward revisions for India, Brazil and Russia total 0.8pp, 1.1pp and 1.7pp for 2013 and 2014, respectively. 

The US private sector’s positive growth momentum is supported by the housing market recovery, improving household balance sheets, strong corporate profitability and loose monetary conditions. Fiscal drag, stemming from tax increases and spending cuts due to the sequester, is a near term downside risk. GDP growth will accelerate from 1.9 per cent in 2013 to 2.8 per cent in 2014 and 3 per cent in 2015 as the pace of fiscal consolidation eases. 

The Eurozone remained mired in recession in the first quarter of this year for a record sixth consecutive quarter, and leading indicators for the second quarter 2013 are mixed. Nonetheless, Fitch expects a weak recovery to start in the second half of the year and gradually strengthen in 2014-15 as gains in competitiveness and country and cross-sectional rebalancing bear fruit, fiscal consolidation eases and credit channels are repaired. It forecasts GDP to contract by 0.6 per cent in 2013, before growth of 0.9 per cent in 2014 and 1.3 per cent in 2015. 

Fitch maintains its expectations of a modest and gradual recovery in the UK. UK GDP growth forecasts are unchanged at 0.8 per cent in 2013 and 1.8 per cent in 2014, followed by 2 per cent in 2015. Progress with balance sheet adjustment of the private sector, including the reduction in the household debt to income ratio, and the prolonged period of accommodative monetary policy stance will gradually translate into strengthening of private demand. However, fiscal consolidation will remain a drag on the economy over the medium term. 

‘Abenomics’, the reflationary economic policy strategy in Japan, will buoy growth in the short term, though its medium term success is less certain. Fitch forecasts growth of 1.8 per cent in 2013 as fiscal and monetary stimulus provides an initial boost to confidence, before moderating to 1.5 per cent in 2014 and 1.2 per cent in 2015 as the impetus fades. 

In this Global Economic Outlook’s alternative scenario, Fitch looks at the implication of an even greater and enduring boost to confidence in Japan, which lifts real GDP growth further in 2014-2015 and nominal GDP growth by up to 1 per cent a year on a lasting basis, relative to the baseline. East Asia would benefit through greater trade and the rest of the world mainly via higher equity prices. By 2020, the world’s third biggest economy would be 7 per cent or some US$480 billion larger relative to the base line and better placed for fiscal consolidation. 

Loose monetary conditions will persist over the forecast horizon. Despite recent market palpitations over the timing and impact of the eventual exit from loose monetary policy by the US Federal Reserve, Fitch expects central bank policy in major advanced economies to be gradual and in line with domestic growth and inflation developments. Fitch expects the US Federal Reserve to only start increasing interest rates in mid-2015, after tapering quantitative easing in 2013-2014. Other central banks will likely take it slower. Nevertheless, uncertainty over the exit from current unprecedented monetary policy settings is likely to generate bouts of market volatility. 


Fitch Ratings says in its newly published Global Economic Outlook that it expects the global economy to strengthen gradually.