Fitch Cuts Global GDP Forecast to 2.4%
As a result of an expectation of economic slowdown, Fitch Ratings has cut the global gross domestic product (GDP) growth forecast for 2022, citing supply shocks and faster rate hikes by central bankers to fight inflation, according to its recent report.
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 rating agency said in the latest release.
Fitch now expects world GDP to grow by 2.4% in 2022 – revised down by 0.50 percentage point (pp) since June- and by just 1.7% in 2023, a cut of 1pp. 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.
According to the report, Fitch expects the Eurozone economy to contract by 0.1% in 2023 – a drop of 2.2pp since June reflecting the impact of the natural gas crisis. “We now expect US growth of 1.7% in 2022 and 0.5% in 2023, revised down by 1.2pp and 1pp, respectively”, the rating firm said.
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 0.9pp and 0.8pp, 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.
Fitch noted that these supply-side impacts would be exacerbated if rationing became necessary to avoid outright gas shortages, a key risk in Germany. 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 a huge impact on the consumer price index (CPI), inflation. By means of illustration, it said a three- to a four-fold rise in retail gas and electricity prices would add more than 15pp to the CPI.
It is noted that Governments are forging responses to protect consumers and we anticipate more muted retail price rises. But these support measures could have significant fiscal costs. READ: EA Forecasts 6% Increase in Global Oil Demand
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 European Central Bank refinancing rate is expected to rise to 2% by December, and the Bank of England Rate is forecast to reach 3.25% by February 2023.
It said the Fed and BOE are in quantitative tightening mode, with the BOE planning outright bond sales. 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, Fitch Ratings said. #Fitch Cuts Global GDP Forecast to 2.4%
