Fitch: Global Growth Shows Resilience to Political Uncertainty

The near-term outlook for growth in the advanced countries has improved despite persistent political uncertainties says Fitch Ratings in its latest Global Economic Outlook (GEO).

“Robust labour markets and consumer spending, more supportive fiscal policies and the stabilisation in emerging markets helped advanced country growth recover in the second half of 2016,” said Brian Coulton, Chief Economist, Fitch. “Furthermore, a synchronised improvement in manufacturing business surveys across the advanced countries suggests growth momentum has continued into early 2017.”

Advanced country growth is expected to pick up to 1.9% in 2017 and 2% in 2018 from 1.6% in 2016. The acceleration is led by the US, with growth in the eurozone and Japan expected to remain broadly stable. Fitch’s latest forecast changes include upward revisions to 2017 growth of 0.3pp for the eurozone and the UK, 0.2pp for Japan and an upward revision of 0.3pp for 2018 for the US.

“While there is genuine upside to the near-term outlook – stemming primarily from a faster-than-expected easing of US fiscal policy and the possibility of animal spirits sparking a more rapid US private investment recovery – downside risks also loom large,” added Mr. Coulton.

An aggressive pursuit of protectionist trade polices by the new US administration could spark retaliation and global currency volatility, undermining business confidence. Longer term, if the US were to shift to a more producer-focussed or ‘mercantilist’ model, with the aim of permanently shrinking trade deficit, it is hard to see who else would step in to fill the gap in global demand. Ultimately, the US has been the world’s consumer of last resort for decades with many countries’ economies geared to supplying US demand.

In the eurozone, the re-emergence of concerns about fragmentation of the currency-bloc could result in tighter credit conditions and significantly reduced growth. In a more severe scenario, where an overtly anti-EU leader were to cement a strong majority in a major eurozone country the macro disruption could be highly damaging.

“The linkages from political uncertainty to economic growth are never straightforward, but for now we are looking at a synchronised improvement in the macro outlook across the advanced countries,” Mr. Coulton continued.

Improving growth prospects and increased fiscal policy support are moving the world economy further away from the scenario of ‘never-ending’ quantitative easing by the major central banks. Fitch now expects the US Fed to raise rates three times this year (up from two hikes in Fitch’s November forecast) and by a total of seven times over 2017 and 2018. This is in stark contrast to just two hikes over the previous eight years.

The European Central Bank (ECB) remains resolute in providing additional monetary stimulus at this juncture but they are facing increased communication challenges as headline inflation rates rise. There are also some signs that previous monetary stimulus may be gaining a little more traction on the real economy, with a further pick-up in private credit growth in core eurozone countries and a buoyant real estate market in Germany. ECB asset purchases are likely to be continued in line with the forward guidance provided by the ECB at last December’s meeting but Fitch expects them to be phased out through the first half of 2018.

The Bank of Japan (BOJ) has held short-term interest rates steady at -0.1% and Fitch no longer expects further cuts into more negative territory. The yen has weakened significantly since the November GEO and the BOJ has become somewhat more optimistic on the growth outlook.

Emerging market growth is expected to rise to 4.7% this year, up from just over 4% in 2015 and 2016. This reflects the return to modest positive growth rates in Russia and Brazil. However, EM growth prospects are slightly weaker than previously forecast, with downward revisions to Mexico, Turkey and Brazil. There are also signs of a shift in the policy stance in China. Following the success of the stimulus measures rolled out from late 2015 in supporting growth, the Chinese authorities have recently shifted focus towards trying to start to address the problem of rapidly rising leverage. The cuts in official interest rates that Fitch previously expected in 2017 no longer seem likely. This change of emphasis has come a little earlier than expected and is likely to result in some sequential slowing of growth later this year. Fitch 2017 growth forecast for China has been edged down slightly to 6.3%.

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