The global economy is expected to gradually pick up steam in the next couple of years, but the risks remain to the downside, says Fitch Ratings.
In its latest Global Economic Outlook, the rating agency actually trimmed its forecasts slightly. Still, it predicts that global growth will accelerate gradually in 2014 and 2015. Fitch’s latest forecasts for world GDP growth are 2.7% in 2014, and 3.1% in 2015 and 2016, up from 2.4% in 2013. The 2014 and 2015 forecasts are 0.2 and 0.1 percentage points lower from its previous forecast, respectively.
The forecast pick-up this year is to be driven by a strengthening recovery in major advanced economies; whereas, growth is seen slowing in emerging markets, Fitch says. It also indicates that deflation in the eurozone is a meaningful risk, the U.S. Federal Reserve Board’s path towards normalizing monetary policy could trigger heightened financial market volatility, global trade growth could slow further, and higher oil prices could also hurt growth in most regions.
For the U.S. economy, Fitch is projecting a bounce-back, after an unexpected contraction in the first quarter. It is forecasting real GDP growth of 2% in 2014, which is down sharply from 2.8% in its previous forecast. It also sees 3.1% growth in 2015 and 3% in 2016.
Fitch notes that the recovery remains fragile in the eurozone. It is projecting eurozone GDP growth of 1.1% in 2014, followed by 1.5% in 2015, and 1.6% in 2016. For Japan, it is expecting growth of 1.6% in 2014, and 1.3% in 2015 and 2016.
Yet, in emerging markets, Fitch expects growth to slow to 4.3% in 2014 from 4.7% in 2013, before rising once again to 4.8% in 2015 and 4.9% in 2016. “Constraints from infrastructure bottlenecks, business environments and unbalanced growth models have reduced medium-term growth potential in many countries. Other headwinds include volatile funding conditions, weaker non-oil commodity prices, a slowdown in global trade growth and political shocks,” it notes.
On the monetary policy front, Fitch expects the U.S. Fed and the Bank of England to start gradually tightening policy over the next 12 months as their economies strengthen. Yet it warns that normalizing monetary conditions after more than five years of virtually zero interest rates and unwinding balance sheets that have been inflated by quantitative easing is “historically unprecedented and may well trigger some increase in financial market volatility from unusually low levels.”
“This will also create a divergent path with the [European Central Bank (ECB)] and Bank of Japan, which are still loosening monetary policy and expected to keep interest rates unchanged to at least 2016,” it adds.