Global growth resilient but inflation risks persist: Fitch

June 22, 2023 (MLN): Global growth is showing near-term resilience but with core inflation remaining stubbornly high, central banks will have to continue tightening policy in the coming months, Fitch Ratings said in its June Global Economic Outlook (GEO).

With monetary policy adjustments and their impact on the economy proving more protracted, the global growth outlook for 2024 has deteriorated.

World activity is holding up better than expected and Fitch has raised its forecast for global GDP growth in 2023 to 2.4%, from 2.0% in the March GEO.

The biggest upgrades have been to emerging markets (EM) where incoming data have been a lot stronger than expected.

“We have revised up EM ex-China growth for 2023 to 2.9% from 2.0% with Brazil, India, Mexico and Russia seeing substantive improvements,” the report highlighted.

“We have raised China’s 2023 forecast to 5.6% from 5.2% after a swifter-than-expected reopening rebound in 1Q23,” it added.

The recovery has faltered somewhat in recent months but consumption continues to normalize and macro policy is starting to be eased.

Moreover, the Fitch rating has also raised the US growth forecast for 2023 to 1.2% from 1.0% as consumption and job growth remain robust.

Expectations are that Fed tightening will push the economy into a mild recession, but the timing of this has been pushed out to 4Q23-1Q24.

The US growth forecast for 2024 has, accordingly, been cut to 0.5% from 0.8%.

While, Eurozone growth forecasts for 2023 and 2024 are unchanged at 0.8% and 1.4%, respectively.

The European natural gas crisis has eased further but the ECB is tightening monetary policy more aggressively, it added.

The Fitch rating still expects a UK recession in 2023 as higher interest rates increase the household debt-service burden.

It has lowered the world GDP forecast for 2024 to 2.1% from 2.4% in March, due to longer lags in the impact of higher interest rates, along with weaker base effects for EM growth.

It highlighted that the headline inflation has fallen, but core inflation remains stubbornly high, perpetuated by rising services inflation.

Wage growth in the US and Europe far exceeds rates consistent with inflation targets as labour markets remain tight.

Advanced country central banks have become more concerned about inflation persistence, and Fitch has revised rate forecasts widely.

Fitch now expects the Fed and the ECB will raise rates two more times in the coming months to peaks of 5.75% and 4.5%, respectively, and the Bank of England to raise rates to 5.25%, with no subsequent cuts expected until 2024.

In EM, by contrast, China recently cut rates and Brazil and Mexico are expected to cut later this year.

To note, low unemployment, savings buffers accumulated during the Covid-19 pandemic, and easing supply shocks have contributed to recent growth resilience.

However, monetary tightening is gaining traction and increasingly will weigh on US and European demand over time.

There was no immediate credit crunch in the aftermath of recent US banking stresses but bank funding costs are rising.

Moreover, with central bank quantitative tightening policies withdrawing liquidity, there is a risk of sharper-than-expected credit tightening hitting growth.

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