The global economic outlook has improved according to Fitch Ratings, which now sees a smaller contraction in growth than it forecast earlier this year.

Fitch Ratings said, in a report published today, that the global economic recovery is underway. It now forecasts GDP in the major advanced economies will shrink at a 3.7% rate this year, compared with the 4.2% it forecast in June. “This reflects better outcomes than expected for [the second quarter] in most [major economies] (with the exception of the UK and Spain) and stronger forecasts across the board for a return to positive growth in [the second half],” it said.

It has also raised its 2010 forecast for growth in the major advanced economies, which is now projected at 1.2%, up from 0.7% in June. With growth in the Brazil, Russia, India and China economies also expected to pick up, Fitch predicts global growth to reach 2% in 2010, rising to 2.7% in 2011.

“The global economic recovery has begun,” says Brian Coulton, head of EMEA Sovereigns and Global Economics at Fitch Ratings. “The ‘green shoots’ emerging in financial markets and in sentiment indicators during the second quarter of this year have now been corroborated by hard indicators of rising economic activity.”

“The near-term pick-up in activity is being driven by the inventory cycle, policy stimulus and improved financial conditions. However, while it seems clear that GDP is rising, this is from an extremely low base. Fitch expects the pace of expansion to remain weak by the standards of previous recoveries and fragile to shocks,” cautions Coulton.

That said, Fitch says it does not expect the current pick-up to prove illusory. “While the pace of growth may ease somewhat in mid-2010 as the boost from the inventory cycle and normalisation in world trade flows fades, GDP is expected to maintain positive momentum throughout 2010 as the full impact of fiscal policy expansion is felt,” it says.

IE