Ratings agency Fitch just released its latest quarterly Global Economic Outlook (GEO), where it is forecasting weak economic growth for the major advanced economies at 1.1% for 2012, with a “modest acceleration” to 1.8% for 2013.
This is in contrast with global growth forecasts at 2.3% and 2.9% for 2012 and 2013 respectively, downgraded 0.1% from its previous report.
The Eurozone (EZ) will be the weakest, with a mild recession more than likely – somewhat optimistic?
“Fitch expects the eurozone to have the weakest performance among MAEs. Real GDP is projected to contract 0.2% in 2012, and grow by only 1.1% in 2013. Sizeable fiscal austerity measures and the more persistent effect of tighter credit conditions on the broader economy remain key obstacles to growth,” says Gergely Kiss, Director in Fitch’s Sovereign team.
Given the 0.3% decline of quarterly GDP in Q411 and weakness of PMI indicators in March, a recession in H112 is now likely. Among its four largest members, Fitch forecasts more divergence over the forecast horizon. 2012 GDP will contract in Italy and Span by 1.6% and 1%, respectively, while Germany and France will have positive growth of 0.7% and 0.4% respectively.
Fitch stays with the consensus view that a US recovery is underway, significantly upgrading 2012 GDP growth:
Growth is supported by the stronger-than-expected improvement in labour market conditions and indicators pointing to strengthening business and household confidence. In line with the underlying improvement in fundamentals Fitch has upgraded its 2012 US growth forecast to 2.2% from 1.8%, whilst keeping the 2013 forecast unchanged at 2.6%. For Japan and the UK, Fitch forecasts GDP to increase 1.9% and 0.5% respectively for 2012.
Although they remain quite bearish on house prices:
The economic recovery is constrained by the housing market with a continuing decline in national home prices (Fitch expects between 8% and 10% in real terms over the next several years) and construction activity is expected to only pick-up slightly in the near-term.
But risks, as always, abound – the two major risks being higher oil prices and higher bond yields. This is a global economy without robustness:
Since December 2011, financial tensions in the eurozone have eased, meaning the probability of tail events, with severe global consequences, has declined. However, downside risks persist. Fitch’s latest alternative scenario explores two such possibilities: a sharp increase in long yields and an oil price shock. An oil price shock resulting in USD 150/barrel in 2012 would lower global growth by 0.4ppts in both 2012 and 2013, while a 100 bps permanent increase in US and UK long yields would have smaller initial global effects, but its impact would increase over the medium term.
Note in the chart below, the tremendous impact even a 100 basis point (1%) move in bond yields would have on these economies – like certain household’s in Australia:
The upside risk in the US includes an improving private sector balance sheet and strong consumer demand, but this is more than offset by the risk of “progress on US fiscal consolidation global imbalances (which) could unwind in a disorderly fashion”.
This points to continued low interest rates in the short/medium term, even as oil prices start to get out of hand, although Fitch believes like many others that the ECB LTRO “non-standard measure” was successful in the short term. Whether this is borne out in the medium to long term horizon, particularly within German politics, remains to be seen.