Fitch Ratings says a new round of adverse shocks centered on the euro zone is slowing the fragile global economic recovery. In its latest quarterly Global Economic Outlook (GEO), Fitch forecasts real GDP growth of major advanced economies (MAE) to remain weak at 1.1 percent in 2012, before only a modest rebound to 1.7 percent in 2013 and 2.2 percent in 2014.
For its world GDP forecast, Fitch has revised down real growth, based on market exchange rates, to 2.2 percent for 2012 and 2.8 percent for 2013 from 2.3 percent and 2.9 percent respectively in the March edition of the GEO.
"Fitch expects the recent intensification of financial tensions in the euro zone to have a significant negative impact on the real economy. Sizeable fiscal austerity measures in several member states will also weigh heavily on short run growth. Fitch projects euro zone GDP to contract 0.4% in 2012, followed by growth of 0.9 percent in 2013 and 1.5 percent and 2014," says Gergely Kiss, director in Fitch's Sovereign team.
Release of Q1, 2012 GDP data across the euro zone illustrated growing divergence among member states and Fitch expects this to persist over the forecast horizon. The better than expected Q1, 2012 GDP outturn, a flat q/q, following a 0.3 percent contraction in Q4, 2011, provides some support to annual GDP projections. However, the agency forecasts 2012 GDP will contract in Italy and Spain by 1.9 percent in 2012, while Germany and France will have growth of 0.9 percent and 0.4 percent respectively.
Further intensification of euro zone financial tensions is the most prominent downside risk to Fitch's baseline trajectory. Fitch's analysis in this latest GEO edition suggests that potential consequences of a Greek exit from the euro zone would be significant. Simulations indicate that even an “orderly” exit could lead to a deeper and more protracted recession in the euro zone, owing to increased risk aversion. Total loss in output by 2014 could be around 150 billion euros in the euro zone and global GDP would be more than 1.0pp lower by 2014 than in the baseline. Meanwhile, the consequences from a disorderly exit (involving severe contagion to other so-called peripheral countries) would be increasingly damaging and uncertain. Such a shock might be comparable to the 2008-09 crisis, with GDP of MAE falling by 4.0 percent -6.0 percent within a few quarters.
The US is expected to maintain its moderate recovery profile in 2012. Spare economic capacity will help real GDP growth gradually accelerate to average 3.0 percent by 2014. Recent moderation in job growth, likely signaling deteriorating business sentiment, is expected to be compensated with continued resilience in consumer spending. For Japan and the UK, Fitch forecasts GDP to increase 1.9 percent and 0.5 percent respectively for 2012.
Economic growth in BRIC countries has slowed recently and the vulnerability of future growth to domestic and global shocks has increased. Nevertheless Fitch expects GDP growth rates to outstrip MAE growth significantly over the forecast horizon. In Brazil, India and Russia growth rates can pick-up over the medium term from a dip in 2012, while in China Fitch expects growth to stabilize at around 8 percent in 2012 and 2013, followed by 7.5 percent growth in 2014.
Other downside risks are that progress on US fiscal consolidation could unwind in a disorderly fashion. Conversely, improvement in private sector balance sheets could generate stronger demand and improved financial conditions could boost confidence globally.
Ultra-loose monetary conditions will prevail in MAEs over the next few quarters. Fitch expects major central banks to maintain record low interest rates at least until mid-2013. The impact of further monetary stimulus would be doubtful given the already low yields of safe haven assets at longer maturity.
