Fitch reduces medium-term GDP growth forecast for developed countries

The new figures reflect a sustained negative impact from recent adverse economic shocks, including the COVID-19 pandemic and the European gas crisis. The agency expects these events to have a lasting effect on the supply-side productive potential of the economies, leading to slower capital accumulation and a reduction in capital deepening and labour productivity growth.

Particularly in the US and the UK, a continued drop in labour force participation rates relative to pre-pandemic trends is projected. The US potential growth has been lowered by 0.1 percentage point to 1.7 per cent, partially due to slower capital deepening, as per Fitch’s report.

On a more optimistic note, the estimates for Italy and France have been slightly raised by 0.1 percentage points to 0.7 per cent and 1.2 per cent, reflecting improved investment trends in Italy. The growth projections for Australia, Canada, Switzerland, and Spain remain unchanged from the previous assessment in November 2021 at 2.1 per cent, 1.5 per cent, 1.4 per cent, and 1.4 per cent, respectively.

The report also introduces downwards 'levels shock' adjustments to the historical level of potential GDP for 2020, 2021, and 2022 in the UK, Spain, and Italy, and for 2022 in Germany. Taking both these adjustments and revisions into account, Fitch Ratings projects the level of potential GDP by 2027 to be around 2 per cent below the pre-pandemic path.

The latest figures imply deeper long-term 'scarring' from recent shocks than previously estimated. The scarring is projected to be the most profound in the UK at 5.2 per cent, followed by Spain at 3.9 per cent and Germany at 3.5 per cent. In the US, the expected scarring is considerably smaller, at 1.7 per cent.

“GDP in the largest developed economies will not return to its pre-COVID-19 pandemic path, even in the medium term,” said Brian Coulton, Fitch Ratings’ chief economist.

ALCHEMPro News Desk (DP)