December 8, 2021 (MLN): Fitch Ratings, in its latest Global Economic Outlook (GEO), has lowered its global growth forecast to 5.7%, down by 0.3 ppts amid growing inflation concerns and its impact on monetary policy.
In a research note published yesterday, the rating agency has said the scale and longevity of the global inflation shock have taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization.
“A strong recovery in global aggregate demand in nominal terms over the past year has not been matched by an equal recovery in output. Supply bottlenecks resulted in real GDP expanding by less than expected in 3Q21, with prices increasing by more than anticipated,” the report said.
Fitch has also cut its 2021 growth forecasts for the US, Germany and Japan, reflecting recent supply-chain-related disruptions to industrial production.
Despite the downgrade, Fitch said that 5.7% is still the fastest rate since 1973. “We are far from stagflation,” the report underlined.
The rating agency also trimmed the world growth forecast for 2022 to 4.2% from 4.4%, adding that this primarily reflects a more intense slowdown in China. Fitch expects China’s growth to fall to 4.8% in 2022 from 8.0% in 2021.
Fitch has revised US growth in 2021 to 5.7% (from 6.2% in the September GEO) and cut 2022 growth to 3.7% (from 3.9%). It also lowered the eurozone growth forecast for 2021 to 5.0% (from 5.2%), but the forecast for 2022 is unchanged at 4.5%.
Growth in emerging markets excluding China is forecast at 5.7% in 2021 and 4.6% in 2022, both 0.1pp lower than in September, partly reflecting a sharp deterioration in Brazil’s economic outlook, Fitch said.
“There are now signs that price level shocks related to pandemic shortages are starting to morph into ongoing inflation. With monetary policy settings still super-loose, this is worrying central bankers,” said Brian Coulton, Chief Economist with Fitch.
According to the rating agency, the sharp rise in global consumer goods prices since March primarily reflects a surge in goods demand, fueled by stimulus measures, particularly in the US. Goods prices should stabilize in 2022 as spending switches back to services, strong investment boosts goods supply, and fiscal stimulus unwinds.
But there have been widespread upward revisions to inflation forecasts and the increasing prospect of inflation pressures broadening is making central banks nervous, Fitch said, adding that US core CPI inflation is expected to settle at around 3% in late 2022 and 2023, significantly higher than pre-pandemic rates.
Consequently, Fitch now expects Fed to raise interest rates in September 2022 and the Bank of England (BOE) later this month, “both far sooner than we had expected,” it added.
High inflation is raising policy tensions. The Omicron Covid-19 variant of concern represents a downside risk to growth but could adversely affect supply leading to further price increases, implying risks if central banks delay normalization, Fitch noted.
The rating agency further noted that a stronger dollar and weaker Chinese growth could weigh on commodity prices in 2022, adding to constraints on emerging-market growth, including from domestic monetary-policy tightening.
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