Fitch ups global economy outlook

Despite significant financial market volatility and economic policy uncertainty, the global economic recovery is proceeding as expected, Fitch Ratings said.

Its pace is uneven across countries and regions, and it is largely due to accommodative policy support and emerging‐market dynamism.

Fitch has marginally revised up its projections for world growth compared with the projections set out in the October version of the Global Economic Outlook to 3.4 per cent for 2010 from 3.2 per cent in the October 2010, 3.0 per cent for 2011 from 2.9 per cent, and 3.3 per cent for 2012 from 3.0 per cent.

Major advanced economies (MAEs) performed in line with expectations, despite a rebalancing of growth momentum in Q3 2010. In Q2 2010 growth accelerated considerably in Europe and the UK compared with the previous quarter, and slowed for Japan and the US.

In Q3 2010 growth picked up in Japan and the US, and moderated in Europe. Fitch still projects MAE growth of 2.4 per cent for 2010, while projections for 2011 and 2012 have been revised up marginally to 2.3 per cent and 2.5 per cent, respectively.

In contrast to the mixed performance of MAEs, emerging markets continued to outperform expectations. Fitch raised its 2010 forecasts for China, Brazil, and India (Bric) due to still buoyant economic growth. However, the agency revised down its Russian forecast as the pace of recovery proved weak, partly as a result of the severe drought and heatwave in the summer. Fitch forecasts growth of 8.4 per cent for the BRIC in 2010, and 7.4 per cent for each of 2011 and 2012.

In the US, the likelihood of a double‐dip recession has receded considerably and Fitch has raised its growth forecasts by 0.6 per cent for each of 2011 and 2012, bringing estimates to above‐trend growth levels of 3.2 per cent and 3.3 per cent for 2011 and 2012, respectively. In line with the revised growth outlook, unemployment is now expected to moderate, to 9.1 per cent in 2011 and 8.7 per cent in 2012.

Accommodative policy measures extended by authorities have provided a boost to Fitch’s growth outlook, in particular the extension of a number of tax measures and introduction of a second round of quantitative easing (QE2) in November. High frequency activity has also turned more positive, reflecting strength in private consumption and corporate profitability.
Despite the improved outlook, the agency’s view has remained that the recovery will continue to be mild by historical standards in light of still weak labour and housing markets.

The ratings agency attributed Japan’s strong Q3 2010 performance to a temporary increase of consumption ahead of the expiry of stimulus measures. Still‐weak consumer confidence indicators lead Fitch to expect some of the Q3 2010 surprise will be “paid back” in subsequent periods, while persistently weak domestic demand continues to weigh on growth prospects in the medium term.

Fitch’s forecasts incorporate a slowdown of growth to around the long‐term average in 2011 and 2012. The agency expects deflation to persist into 2012 as weak capacity utilisation restrains prices, and does not anticipate a radical change of policy course from the Bank of Japan.

In the euro area, the agency has stated that although economic challenges facing the peripheral economies are significant, the severity of the market turmoil is not warranted by underlying fundamentals. Still, heightened volatility has eroded the growth outlook for a number of countries, resulting in a downward revision of someof Fitch’s growth forecasts in the area. Conversely, the agency has revised up its outlook for Germany due to its view that secular growth is now emerging along with
the expected cyclical rebound following the sharp contraction in 2009.

Fitch revised down its forecast growth in the UK over the medium term, reflecting the agency’s view that the recovery will be even slower than expected in 2011 and 2012 due to a weakening of confidence in the context of heightened volatility in Europe and plans for fiscal consolidation at home.

The interest rate outlook for MAEs remains subdued, as it now expects monetary policy authorities to keep rates looser for longer than forecast earlier.

Follow Emirates 24|7 on Google News.