Fitch Ratings downgrades emerging market growth forecast, citing China's slowdown

November 06, 2023 (MLN): Fitch Ratings has reduced its estimate of medium-term potential growth for the 10 emerging markets (EM) covered in its Global Economic Outlook (GEO) to 4% on a GDP weighted-average basis, down from 4.3% in its previous assessment in 2021, as revealed in the agency’s latest report.

The reduction is mainly due to a large reduction of 0.7pp to the estimate of China’s supply-side growth potential.

Average EM10 potential growth on an unweighted basis remains unchanged at 3%, reflecting upward revisions elsewhere.

“We have cut the estimate for China to 4.6% from 5.3%, for Russia to 0.8% from 1.6%, for Korea to 2.1% from 2.3% and for South Africa to 1.0% from 1.2%,” the report reads further.

Conversely, Fitch Ratings has made large upgrades to India and Mexico, with the latter benefitting from a much better outlook for the capital-to-labor ratio.

India’s estimate is higher at 6.2% from 5.5% and Mexico’s at 2% from 1.4%. While the estimate for Poland has been revised to 3.0% from 2.6%, for Turkiye to 4.1% from 3.9%, for Brazil to 1.7% from 1.5%, and for Indonesia to 4.9% from 4.7%.

However, the latest estimates remain below our pre-pandemic potential growth projections for all the EM10 except Brazil and Poland.

This reflects deteriorating demographic trends and the legacy of disruptions from the pandemic.

The latter is partly reflected through revisions to projections for capital stock and productivity growth.

Some “scarring” effects are hard to capture and we have now made additional downward “level shock” adjustments to historical estimates of potential GDP in 2020 and 2021 for Mexico, Indonesia, India, and South Africa.

Including these level shocks and changes to our forward-looking growth estimates means that the projected level of EM10 potential GDP by 2027 is 3.0pp below the path implied by extrapolating forward our pre-pandemic estimates of potential growth from 2019.

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