September 15, 2022 (MLN): Global rating agency Fitch has cut the global GDP forecast to 2.4% in 2022, revised down by 0.5 percentage points (ppt) since the June assessment – and by just 1.7% in 2023, a cut of 1 ppt.
Fitch said that it's September 2022 Global Economic Outlook (GEO) includes deep and wide cuts to global GDP forecasts as the European gas crisis, high inflation and a sharp acceleration in the pace of global monetary policy tightening are taking a heavy toll on economic prospects.
The eurozone and UK are now expected to enter recession later this year and Fitch forecasts that the US will suffer a mild recession in mid-2023.
Fitch expects the eurozone economy to contract by 0.1% in 2023 – a drop of 2.2ppt since June reflecting the impact of the natural gas crisis. Fitch now expects US growth of 1.7% in 2022 and 0.5% in 2023, revised down by 1.2ppt and 1ppt, respectively. China’s recovery is constrained by Covid-19 pandemic restrictions and a prolonged property slump, and we now expect growth to be 2.8% this year and to recover to 4.5% next year, with downward revisions of 0.9ppt and 0.8ppt, respectively.
“We’ve had something of a perfect storm for the global economy in recent months, with the gas crisis in Europe, a sharp acceleration in interest rate hikes and a deepening property slump in China,” said Brian Coulton, Chief Economist.
The forecast now assumes a full or near complete shut-off of Russian pipeline gas to Europe. Despite EU efforts to find alternatives, the total EU gas supply will fall significantly in the near term, with impacts felt through industrial supply chains. These supply-side impacts would be exacerbated if rationing became necessary to avoid outright gas shortages, a key risk in Germany.
Fitch noted that European wholesale gas and electricity prices have risen nearly tenfold due to the crisis. An unfettered pass-through to retail gas and electricity prices could have huge impact on CPI inflation. By means of illustration, a three- to four-fold rise in retail gas and electricity prices would add more than 15ppt to the CPI, Fitch said, adding that governments are forging responses to protect consumers and more muted retail price rises are expected. But these support measures could have significant fiscal costs, it further said.
As per Fitch, high and persistent inflation, elevated near-term inflation expectations and tight labour markets have prompted the Fed, Bank of England (BOE) and ECB to turn more hawkish in recent months. Policy rates are increasing much more rapidly than expected.
The Fed is now expected to take rates to 4% by year-end and hold them there through 2023; the ECB refinancing rate is expected to rise to 2% by December, and the BOE Bank Rate is forecast to reach 3.25% by February 2023, Fitch said. The Fed and BOE are in quantitative tightening mode, with the BOE planning outright bond sales, it added.
Fitch further noted that in contrast to the role of quantitative easing in the pandemic, central bank policies are no longer supportive of fiscal easing to protect households and firms from economic shocks. With liquidity conditions tightening, large-scale fiscal easing could push up long-term real interest rates.
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Posted on:2022-09-15T11:40:19+05:00
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