GLOBAL inflation pressures have continued to intensify with increasingly adverse implications for the growth outlook, according to Fitch Ratings.
In its Global Economic Outlook (GEO) for June 2022, the international rating agency said recent lockdowns in China are adding to global manufacturing supply-chain pressures while energy and food supply disruptions from the Russia-Ukraine conflict are having a swifter impact on European inflation than expected.
Inflation pressures are also building in the services sector, particularly in the US and UK, where tight labour markets are boosting nominal wage growth.
In this regard, Fitch has revised up its inflation forecasts widely and sharply, particularly for Europe in 2H 2022.
“We have lowered our world 2022 GDP (gross domestic product) growth forecast by 0.6pp (percentage points) since the March GEO to 2.9%,” it projected in a non-rating commentary. “The biggest revision is to China where we now expect growth to fall to 3.7% this year, down from 4.8% in March.”
For the US, the rating agency has revised down its growth forecasts also by 0.6pp to 2.9% and eurozone by 0.4pp to 2.6%. “We have cut our world growth projection for 2023 by 0.1pp to 2.7%,” added Fitch Ratings.
The lockdown in Shanghai will lead China’s GDP to fall in sequential quarterly terms in 2Q 2022 and with the ‘dynamic-zero’ COVID-19 policy still in place, the rating agency does not see a swift bounce back.
In the eurozone, Fitch Ratings expects inflation to drag on consumers’ real incomes with the German industry already being hit by supply-chain disruptions and the China slowdown.
The rating agency said 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 on more aggressive monetary tightening,” it opined. “We forecast US growth to fall to 1.5% in 2023 and 1.3% in 2024. Historical experience points to a significant risk of a US recession in the wake of sharp monetary tightening.”
Against such backdrop, Fitch Ratings expects the US Federal Reserve to raise interest rates to 3% by 4Q 2022 and to 3.5% by 1Q 2023 which are above their estimates of the neutral rate and hence to a ‘restrictive’ stance.
“We also now see the Bank of England hiking rates to 2% by 4Q 2022 and 2.5% by 1Qb2023,” added the rating agency. – June 14, 2022
