Sharp Deterioration in Growth Outlook But No Global Recession

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Thursday, March 21 2019 / 12:43 PM / Fitch Ratings


Global growth prospects have deteriorated significantly since Fitch Ratings' last Global Economic Outlook (GEO) in December 2018, but while we have quite aggressively cut our forecast for 2019, we do not see the onset of a global recession, says Fitch's Economics team.

The eurozone (EZ) growth outlook has weakened particularly sharply, evidence of a slowdown in China has become much clearer and activity in other emerging markets (EM) has decelerated, led by abrupt macroeconomic adjustments in Turkey and Argentina in the aftermath of last summer's currency crises. This has occurred against the backdrop of world trade growth weakening steadily through 2018. The US-China trade war may have supressed and distorted trade flows, but more fundamentally, weaker EM domestic demand has been a key contributor to the trade slowdown.

We have reduced our global growth forecasts for 2019 and 2020 to 2.8% from 3.1% and 2.8% from 2.9%, respectively. The 0.4pp decline in growth we are now expecting between 2018 and 2019 would be the biggest year to year decline in global growth since 2012. Furthermore, out of 20 countries covered in the GEO, we have lowered our 2019 growth forecasts for 15 of them.

"After such a widespread deterioration in the numbers it's not easy to pinpoint the ultimate source of the shock. But we believe the evidence points to weaker EM demand being a key driver of the downturn in global industrial production and world trade. Weaker EM demand in turn reflects the earlier deleveraging drive in China and the fall-out from last summer's forex volatility in other EMs. The tightening in dollar liquidity we saw last year as the Fed raised rates has clearly had some adverse global growth implications, even if the US economy itself has been pretty resilient," said Brian Coulton, Fitch's Chief Economist

Despite the sharply deteriorating growth picture, we do not see the onset of a global recession. The US economy is still growing above trend, low unemployment and solid household income growth are supporting consumer spending and fiscal policy is being eased. Some of the recent EZ weakness reflects temporary factors that should start to abate soon. China has eased policy further both through tax cuts and lowering banks' reserve requirements. The increase in US tariffs on Chinese imports that we had been expecting at the beginning of March has not yet materialised and there are growing hopes that it may be avoided.

"It is possible we are all underestimating the impact of China's economic cycle on global growth dynamics. China's economy is huge now and the slowdown in nominal GDP last year has reverberated widely. But as China's growth indicators have weakened, the policy response has been stepped-up and we think this easing will gain traction in stabilising growth from the middle of this year. China and EM will play a crucial role in the outlook for world trade and GDP growth over the next 18 months," added Coulton.

Moreover, there has been a sizeable shift in the global monetary policy environment in the last few months. The Fed has signaled a pause from its previous guidance of ongoing rate increases and we now only see one rate hike this year compared with three hikes penciled in for 2019 in the last GEO. The ECB has also responded quite swiftly to the growth surprise and now seems unlikely to raise interest rates before the end of 2020. We now think that the ECB will restart net asset purchases later in 2019. With the Fed also indicating in recent months that its balance sheet run-down is likely to stop at the end of 2019, this adds up to a much more generous outlook for global liquidity through 2019 than previously expected.

This will take pressure off EM central banks to tighten policy and perpetuate an environment of low market interest rates. We have lowered our interest rate forecast for several large EMs. Easier global liquidity risks distorting the allocation of capital over the medium term but in the near term it will support the US housing sector and reduce pressure on corporate, sovereign and EM borrowers who have taken on sizeable additional debts in recent years.

Since December's GEO, the largest 2019 forecast revisions are for Turkey (-1.7pp), Italy (-1pp), Australia (-0.7pp), Switzerland (-0.7pp), and Germany (-0.6pp). The EZ as a whole has seen a 0.7pp cut. Only Poland has had its forecast revised up, following a large-scale fiscal easing package. China's forecasts remain unchanged and while US 2019 growth has been revised down 0.3pp we have not fundamentally altered our broad expectation of above trend growth this year.


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