The outlook for the global economy and sovereign credit is at a critical and uncertain juncture, says Fitch Ratings in a new report

The rating agency’s report indicates that, while the economic data shows the global recovery is strengthening, concerns over sovereign debt sustainability in some euro area countries and renewed market volatility are raising the risk of a double-dip recession.

It isn’t forecasting another pullback. Rather, Fitch’s base case is that global GDP will grow by 3.1% in 2010, driven by a rebound in world trade, the inventory cycle, and accommodative fiscal and monetary policies. And, it expects that the continuation of loose monetary policy should support continued expansion in 2011. However, it warns that, “the high degree of macroeconomic uncertainty is highlighted by the presence of inflation and deflation risks, and the scope for policy misjudgements is high.”

“While not our central case, the elevation of Euro area sovereign debt fears and renewed financial market volatility has increased the risk of a double-dip recession, a scenario that would feed back adversely on bank asset quality and public debt dynamics,” says Brian Coulton, head of global economics at Fitch.

That said, the rating agency expects that the announcement of credible strategies to ensure medium term public debt sustainability will help shore up confidence, and allow private demand to resurface to fuel growth in the advanced economies by 2011.

Fitch also forecasts that emerging market GDP growth will rebound strongly to 5.8% in 2010 and 5.6% in 2011, driven by the recovery in global trade, supportive global and domestic fiscal and monetary policy stimulus, higher commodity prices and favourable base effects. However, it warns that as monetary policy stays looser for longer in developed economies, this will add to risks of inflation and overheating in emerging markets.

IE