Average economic growth in the advanced industrialized economies in 2008 will be 0.75% lower than previously forecast, as a result of tighter global credit conditions, says Fitch Ratings. This revision is despite anticipated further monetary policy easing, the ratings agency says.

Fitch predicts that the global credit shock and a deteriorating outlook in the United States will see average industrialized country growth fall back to 1.8% in 2008. This is well below trend, a full one percentage point weaker than in 2006 and on par with 2003, when activity was still recovering from the bursting of the tech bubble, it says. Monetary policy easing will help, but the impact will not be seen until the second half of 2008 and into 2009, Fitch adds.

“Global economic prospects have taken a sizeable turn for the worse since our last forecasts made in June. The shock to banks’ balance sheets will see them rein in credit growth with material adverse consequences for the real economy,” says Brian Coulton, managing director in the Sovereign Group, Fitch Ratigns.

In the U.S., tighter credit conditions and a deteriorating labour market outlook are likely to result in a broader slowdown in domestic demand, beyond the housing market. Fitch now expects consumer spending to slow as income uncertainty rises and house prices fall. The agency’s forecast for US GDP growth in 2008 has been revised down by 1 percentage point since the June GEO to 1.7%, following 1.8% this year.

With the outlook for domestic demand growth in 2008 even weaker at 1%, the U.S. will effectively export some of its slowdown through lower import demand and a weaker dollar, dragging down growth in other industrialized countries, it says. Decoupling will not be extensive, Fitch maintains.

It adds that this summer’s global credit market shock will have a material impact on growth across the advanced economies as banks react to the rapid and unanticipated expansion in balance sheets by restricting loan growth in the near-term. This shock will affect credit-driven economies more significantly, including the United Kingdom and Spain, both of which are likely to grow well below trend, at 1.9% and 2.5%, respectively, in 2008.

Germany’s recovery has not been a leveraged one and its fundamental strength will remain intact over the medium-term, it forecasts. However, the anticipated pick-up in consumer spending from mid-2007 is likely to be delayed. In combination with lower exports, the euro area’s growth will slow to 2.1% next year.

Easing inflationary pressures, allied with financial stability concerns, have seen the monetary policy outlook change quite dramatically since June. The U.S. Federal Reserve is expected to cut rates by a further 50 basis points by next spring and the Bank of England will lower rates this year. Previously expected further tightening by the European Central Bank will not materialize and the Bank of Japan will delay its normalization of interest rates and move more cautiously over 2008, it concludes.