Weak emerging markets are weighing on global growth, but are not likely to spark a global recession, says Fitch Ratings in a report published on Monday.
The credit rating agency expects the global economy to grow by 2.6% in 2016 and 2.7% in 2017, up slightly from 2.3% growth in 2015, according to the outlook.
“While the global growth concerns of the late summer have not gone away, emerging-market problems do not appear to be causing extreme damage to activity in the major advanced economies,” the Fitch report says. “China looks most likely to muddle through rather than land hard and world trade indicators have improved marginally. Policy stimulus has been stepped up in the eurozone and China and global consumer spending growth is holding up.”
Most of its forecasts are largely unchanged since it last quarterly call, Fitch notes. “Private consumption is holding up in the largest economies,” the Fitch report says. “It has been growing at its fastest rate since before the global financial crisis in the U.S. and Europe and consumer spending indicators have been quite robust in China and Japan.”
Although low oil prices have hurt oil sector investment, the benefit to consumers’ discretionary real income growth is becoming clearer, the Fitch report notes. “Improving labour markets in the advanced countries are also helping job security — with one or two signs of stronger wage inflation emerging in the U.S. — and consumer lending growth has picked up,” the Fitch report says.
On the monetary policy front, U.S. Federal Reserve is “likely to proceed cautiously” after it delivers its first rate hike, which is expected later this month, the Fitch report says. It also predicts the Fed will hike rates four times before the end of 2016.
Meanwhile, the European Central Bank (ECB) and China’s monetary authorities are ramping up stimulus efforts, the Fitch Report notes. And the Bank of Japan (BOJ) could soon join them, “adding to the ongoing divergence in global monetary policy,” the Fitch report says.
Fitch expects China’s growth to continue weakening in the fourth quarter, and into 2016. However, the Fitch report comments: “The worst fears of a very sharp near term deceleration in Chinese GDP growth after the financial market volatility of the summer have not been borne out by subsequent indicators. In addition to robust consumer and service sectors, infrastructure investment has remained fairly strong, supported by policy easing.”
The Fitch report forecasts a slight pick-up in emerging market growth overall in 2016, but cautions that “this is unlikely to feel anything like a real recovery. Rather it mainly reflects a stabilization in Russia, where a huge compression in consumption and imports is boosting net trade.”
The Fitch report notes that Brazil is seen sinking further, with its GDP now expected to fall by 3.7% in 2015 (compared with 3% in the previous forecast) and by 2.5% in 2016 (compared with 1% in its prior forecast) amid sharp declines in investment and consumption, a deteriorating labour market and very limited policy flexibility.