September 17, 2021 (MLN): World GDP is expected to grow by 6% in 2021, slower than the 6.3% growth forecast in the June Global Economic Outlook (GEO), says Fitch Ratings in its latest Global Economic Outlook (GEO).
Fitch noted that the supply constraints are limiting the pace of recovery.
A credit rating agency has revised down the US 2021 GDP forecast to 6.2% from 6.8% in June. A greater share of demand growth is being reflected in price increases and US inflation forecasts have been revised up again.
The global economic recovery is still proceeding rapidly but it is hitting speed limits, it said.
Fitch has also lowered China’s forecast, to 8.1% from 8.4%, as the property slowdown weighs on domestic demand. Forecasts for some other Asian economies have also been revised down following a pick-up in coronavirus cases and renewed restrictions. However, Fitch has revised up eurozone 2021 growth to 5.2% from 5.0%. Poland, Turkey, Mexico, Russia and South Africa have also seen forecast upgrades.
An unprecedented boom in consumer demand for durable goods has stretched the capacity of global suppliers. Supply bottlenecks are curbing the rate of output expansion and creating near-term inflationary pressures.
“These pressures should ease significantly in 2022 as demand growth moderates and supply responds. But price pressures are shifting the tone of the policy debate. Fiscal and monetary policy support for growth will start to wane next year,” said Brian Coulton, Fitch Ratings’ Chief Economist.
The boom in demand for consumer durable goods has been so strong that supply was unable to keep pace. The global semiconductor market has proved to be a key bottleneck given the heavy electronics component of durables demand. Supplier delays for US manufacturers have reached levels last seen in the 1970s. Car production has been affected by component shortages. Goods scarcities look likely to persist well into 2022.
With regards to labour shortages, the reports have also become much more widespread since the spring and have been reflected, for instance, in business survey responses and surging unfilled vacancies.
The report noted that the progress with vaccine rollout is limiting the impact of renewed increases in Covid-19 cases on economic activity in Europe and the US. But virus dynamics are influencing growth more heavily where vaccination rates remain lower. The pandemic is still constraining labour supply.
The above-mentioned supply constraints have generated inflation pressures that are proving more intense and durable than anticipated in the June GEO. These go well beyond rising commodity prices and are most evident in global and, in particular, US goods price inflation.
The cost of processed inputs for US firms is rising at its fastest rate for 40 years. Higher costs have been passed onto consumers, with US core CPI inflation at its highest rate since the early 1990s. Goods price inflation should recede next year, but gradually rising US services inflation will prevent US core inflation falling below 3% by the end-2022. Inflation pressures are less intense in other advanced economies, but end-2021 CPI forecasts have been revised up widely, the report highlighted.
Inflation pressures are influencing the policy debate. Central banks have emphasized the likelihood that the current rise in the rate of inflation will be temporary, but recent surprises on inflation have changed the tone of the macro policy debate. The Fed is now expected to start tapering asset purchases this November. This is a few months earlier than Fitch expected in the June GEO. It is likely that the Fed will see its threshold of “substantial progress” towards restoring full employment achieved by October. The tapering is expected to last just under a year.
Fitch now anticipates two Fed hikes in 2023.
The Bank of England is also now expected to hike rates in 2023 and emerging-market (EM) monetary policy has seen a rapid about-turn. Peak global fiscal stimulus is behind us. Furlough schemes in Europe are being unwound.
The report said that deleveraging dynamics in the property sector are weighing on China’s recovery. The macro policy is starting to be recalibrated but slower housing activity will take a toll on domestic demand and global commodity markets. Challenges to the EM growth outlook for 2022 are starting to build.
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