Fitch Ratings has cut its global economic forecast on weakness in the recovery of the advanced economies.

In its latest quarterly global economic outlook released Monday, Fitch has revised down its growth forecasts for all major advanced economies. Growth in emerging markets will also moderate, it says. Overall, the rating agency has revised down its world growth forecast to 2.6% in 2011, down from 3.1%, and it has cut its 2012 forecast to 2.7% from 3.4% previously. It also now sees 3.1% growth in 2013, down from 3.4% previously.

Fitch says that while temporary factors are still playing a role in suppressing economic activity, the recent intensification of financial market volatility and fiscal policy uncertainty has eroded confidence, which is, in turn, undermining private consumption and business investment growth.

“Fitch does not project a ‘double-dip’ in its baseline global economic projections. However, the likelihood of a recession has increased, as intensified financial market volatility could further amplify risk aversion behaviour and lead to tighter credit conditions,” says Maria Malas-Mroueh, director in Fitch’s sovereign team.

“In the euro area, forecasts now incorporate near-zero quarterly growth until Q112, partially reflecting the impact of the ongoing sovereign debt crisis as sentiment across Europe has weakened and uncertainty has increased markedly since June,” added Malas-Mroueh.

Its 2011 forecast for Europe is little changed at 1.6% compared with 1.7% previously, although 2012 has been revised sharply down to 0.8% from 1.8% in the previous outlook, and 2013 was also revised down to 1.5% from 2.1% previously.

For the US, Fitch has downgraded its growth forecasts to 1.5% in 2011 compared with 2.6% in the previous forecast, and cuts its 2012 call to 1.8% from 2.8%, for 2013 it sees 2.6% growth, down from previous expectations of 2.9%.

“The slowdown in the US economic recovery highlights the extent of the policy challenge facing the US and many of its peers. At this juncture in the global economic recovery, the capacity of policymakers to respond to macroeconomic weaknesses with counter measures is considerably weaker than it was in the immediate aftermath of the failure of Lehman Bros. in 2008,” it says. “Large deficits, steep increases in public debt and sovereign contingent liabilities from financial sector support measures have sharply increased fiscal policy uncertainty and reduced the capacity for sovereigns to use their balance sheets to support the wider economy.”

The report does not include a separate forecast for Canada.

There are both upside and downside risks to the outlook. Fitch says that a gradual easing of the euro area sovereign debt crisis, or a large decline in oil prices could support a more robust recovery. “However, household and financial sector deleveraging and fiscal consolidation in a fragile financial landscape will limit growth. The persistence of severe global financial market volatility, especially in the euro area, could intensify funding pressure on banks, amplifying risk aversion behaviour and leading to credit contraction,” it cautions.

IE