Fitch Ratings says its global growth forecast revisions since May have been modest but this belies a significant deterioration in the balance of global macro risks post-Brexit. This will mean central banks remain cautious and monetary policy normalisation is even further away, says Fitch in its latest bi-monthly Global Economic Outlook report.
“The political debate in the UK over Brexit highlighted concerns with the impact of globalisation and immigration which are present not just in Europe, but in other major economies around the world,” says Brian Coulton, Chief Economist at Fitch. “The risk of political events disrupting market confidence has increased. A rise in trade protectionism in the context of faltering growth would be damaging for the global economy. Threats to European integration could impinge on eurozone growth prospects over the medium term.”
Brexit is likely to amplify the divergence in global monetary policy that sparked the US dollar’s rally in mid-2014, with central banks now focussed on preventing a widespread tightening in credit conditions.
“Fitch expects the Fed to raise rates only once in 2016 and twice in 2017 compared with our previous forecast in May for two rates hikes in 2016 and three in 2017. In the eurozone, the ECB is increasingly likely to extend its asset purchase programme beyond March 2017 but may need to revisit the programme’s eligibility criteria in order to do so. Both the Bank of England and Bank of Japan will likely cut rates soon,” added Coulton.
While Brexit sent shockwaves through financial markets it is unlikely to spark a global recession as direct trade linkages from the UK to the rest of the world are small. Overall, world growth based on the ‘Fitch 20’ group of countries we use as a proxy for global growth is 0.1% weaker than forecast in May in both 2017 and 2018. With advanced economy growth now expected to remain steady at just over 1.5% over the next two years, world growth is no longer expected to return to 3% by 2018.
UK growth will be sharply affected by elevated Brexit uncertainty on investment and hiring, although our latest forecasts do not foresee an outright recession. UK GDP growth is expected to fall to 0.9% in 2017, a downward revision of 1.1% compared with the previous forecast. Eurozone GDP growth in 2017 has been reduced to 1.4% from 1.6%, with a similar adjustment made to 2018.
Economic developments outside of Europe point to a steady, rather than deteriorating, growth picture. US growth forecasts for 2017 and 2018 have been shaved by 0.1%, reflecting weaker eurozone growth and a slightly stronger dollar. Japanese growth has been revised up in 2017 as the previously planned consumption tax hike has been delayed, but the recent strengthening of the yen has capped this upward revision at just 0.1%.
In stark contrast to recent forecast changes, the outlook for emerging market growth is looking slightly better. Growth in China has been revised up to 6.5% in 2016 following better-than-expected data, while both Russia and Brazil are now expected to see shallower recessions in 2016. The stabilisation of global commodity prices is easing pressure on commodity producers.
