Dec 6 (The following statement was released by the rating agency)
Fitch Ratings says in its latest Global Economic Outlook (GEO) that world growth will accelerate in 2014 and 2015 driven by a more robust recovery in major advanced economies (MAE), while emerging market (EM) growth rates will improve only modestly. Our latest forecasts for world GDP growth, weighted at market exchange rates, are 2.3% in 2013, firming to 2.9% in 2014 and 3.2% in 2015 (unchanged from the September GEO).
"Although latest trends support our base case that a stronger global expansion is gradually taking hold, several risks lie ahead, including the impact of Fed tapering, EM growth stresses, fresh setbacks in the eurozone and the risk of deflation," says Gergely Kiss, Director in Fitch's Sovereign team. 3Q13 outturns contained some positive growth surprises in MAEs. The UK (0.8% qoq) and US (0.7% qoq) registered their strongest growth this year and, although eurozone growth slowed (0.1% qoq), cyclical conditions have continued to improve in the periphery.
Fitch forecast real GDP growth in the US to strengthen from 1.7% in 2013 to 2.6% in 2014 and 3.0% in 2015, underpinned by the housing market, rising employment and strong corporate profitability. We forecast the unemployment rate to decline to 6.9% in 2014 and 6.5% in 2015 from 7.5% in 2013. The main downside risks to growth are a renewed fiscal squeeze or dent in confidence from brinkmanship over the budget and debt ceiling, global shocks or a sharp rise in long-term US Treasury bond yields.
The agency expects the Fed to start 'tapering' its USD85bn monthly asset purchases sometime between December 2013 and March 2014, depending on economic data. The exact timing is not critical for the growth forecasts. We do not expect the first increase in the Fed's short-term policy interest rate until mid-2015, contingent on a more vigorous recovery and further decline in the unemployment rate to at least 6.5%.
Underlying inflationary pressures have declined markedly over the past quarter in most advanced countries. In the eurozone, the broad-based fall in inflation motivated the ECB's unexpected rate cut in November. The low inflation environment should make it easier for the major central banks to manage expectations and prioritise growth considerations in designing their exits from current ultra-loose monetary policy settings. Nevertheless, the timing and impact of the process remain uncertain, and tighter and more volatile global monetary conditions are a key risk for many EMs, especially those that are dependent on capital inflows.
In the eurozone, 3Q13 growth of just 0.1% qoq highlights the fragility of the recovery following 0.3% qoq growth in 2Q13, which had ended a six-quarter recession. Growth in Germany and France, the two largest economies, slowed sharply, while the cyclical position of Spain and Italy has continued to gradually improve. Spain has recorded its first positive growth rate since 1Q11, albeit only 0.1% qoq.
Following a contraction of 0.4% in 2013, Fitch forecasts eurozone GDP to grow by 0.9% in 2014 and accelerate to 1.3% in 2015 due to a more positive contribution from domestic demand components, supported by the declining drag from fiscal consolidation in most member states, better financing conditions (partly due to the ECB's 25 bps rate cut) and a gradual improvement in private sector balance sheets.
The UK economy maintained its strong momentum in 3Q13 prompting Fitch to marginally revise up GDP growth to 2.3% in 2014 and 2015, while the forecast of 1.4% in 2013 remains unchanged. However, fiscal consolidation and the limited scope to deplete savings and increase household indebtedness will constrain growth over the medium term.
In Japan, reflationary economic policy has provided a short-term stimulus, although its medium-term success is less certain. Fitch does not expect the consumption tax hike scheduled for April 2014 to undo the recovery. We forecast growth of 1.8% in 2013, before moderating to 1.5% in 2014 and 1.2% in 2015. Fitch expects EM growth to improve only modestly from 4.6% in 2013 to 4.8% in 2014 and 5% in 2015. Although it will continue to comfortably exceed MAE growth, the differential between the two groups will decline in 2014-15 to its lowest level since 2002. To varying extents, major EM economies face headwinds from tighter global funding conditions, lower non-energy commodity prices, and idiosyncratic structural weaknesses including persistent political risks.
Fitch's Chinese GDP forecast of 7% growth for 2014 and 2015 is based on the assumption that the current policy debate, following the recent Party 3rd Plenum, results in a renewed commitment to structural reform and rebalancing. Growth will remain broadly stable in Brazil, 2.5% in 2013 and 2014 and 2.8% in 2015. In India and Russia, growth is expected to accelerate from the 2013 cyclical trough of 4.8% and 1.6%, respectively, to 5.8% and 6.8% in India and 2.2% and 2.8% in Russia during 2014 and 2015.
In this GEO's alternative scenario, amid criticisms of Germany's current account surplus, we analyse the impact of more expansionary policy proxied by a 3% increase in consumption starting from 3Q13. The results show that the German economy would grow 0.5pp faster in 2013 and 2014 (a cumulative 1pp higher GDP by 2014). Half of the increase in consumption would spill into imports, resulting in 1pp lower current account surplus. Germany's small open neighbours, Netherlands, Belgium, Austria would benefit the most, with a cumulative boost to GDP in the range of 0.4-0.7pp. The larger eurozone members, France, Italy and Spain, as well as smaller periphery countries, would see a lower impact, not exceeding a cumulative 0.3pp. The effect on growth and current accounts outside the EU would be minor, only visible in Turkey and Russia.
The GEO is available at www.fitchratings.com or by clicking the link above. To complement its release, Fitch has also published a datasheet containing the agency's latest macroeconomic forecasts by country and region.
Link to Fitch Ratings' Report: Global Economic Outlook - Recovery Taking Hold but Risks Still Ahead