Fitch Ratings cuts world GDP growth forecast for 2022 to 2.9%

The ratings agency has also cut world growth in 2023 by 0.1 pp to 2.7 per cent.

“Unrelenting global inflation pressures continue to intensify, with increasingly adverse implications for the growth outlook. Recent COVID-19-related lockdowns in China are adding to global manufacturing supply-chain pressures. Energy and food supply disruptions from the Russia-Ukraine war are having a swifter impact on European inflation than expected,” Fitch said in its Global Economic Outlook (GEO) for June 2022.

The lockdown in Shanghai will cause China’s GDP to fall in sequential quarterly terms in the second quarter (Q2) of 2022 and with the ‘dynamic-zero’ COVID-19 policy still in place, Fitch does not expect there to be a swift bounce back. Eurozone consumers will experience a greater drag on real incomes from inflation, and German industry is being affected by supply-chain disruptions and the China slowdown.

The US economy has near-term momentum, with consumer spending supported by strong growth in jobs and nominal wages. But growth is set to slow from mid-2023 to barely positive rates in quarterly terms due to aggressive monetary tightening.

“Inflation challenges have become so pronounced that central banks are being forced to respond, abandoning prior forward guidance. The risk of inflation becoming embedded as wage-price dynamics develop and price expectations rise is too big to ignore,” said Brian Coulton, Fitch Ratings’ chief economist. Labour markets are very tight in the US and UK, where wage inflation is high and rising as workers resist real wage cuts amid high job turnover.

In this context, Fitch now expects the Fed to raise interest rates to 3 per cent by the fourth quarter (Q4) of 2022 and to 3.5 per cent by the first quarter (Q1) of 2023, i.e. above their estimates of the neutral rate and hence to a ‘restrictive’ stance. The Bank of England may also hike rates to 2 per cent by Q4 2022 and 2.5 per cent by Q1 2023, according to the Fitch report.

The pace of wage growth has also risen in the eurozone, though only to 2.8 per cent. But with near-term inflation much higher, Fitch expects the ECB to raise rates by 100 bp this year followed by 50 bp in 2023. Fitch sees the ECB main refinancing rate at 1.5 per cent by Q2 2023, close to ECB estimates of neutral.

ALCHEMPro News Desk (KD)