October 3, 2016 / 10:42 AM / 10 months ago

Fitch: Political Risks Threaten Global Growth Outlook

13 Min Read

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Global Economic Outlook - September 2016 here LONDON, October 03 (Fitch) Downside risks to advanced country economic growth have risen in recent months, according to Fitch Ratings' latest bi-monthly Global Economic Outlook (GEO) report. With populism gaining traction in many countries, the risk of political shocks adversely affecting the outlook for private investment has increased. At the same time, the capacity of central banks to engender stronger growth appears to be diminishing. Fitch has revised down its forecast for US growth in 2016 to 1.4% in today's GEO from 1.8% in the July GEO. "This year is likely to see the lowest annual growth rate for US GDP since 2009 as oil sector adjustments, weak external demand and the earlier appreciation of the dollar take their toll on industrial demand," said Brian Coulton, Chief Economist at Fitch. With eurozone growth looking likely to have peaked in early 2016 and no significant changes to Fitch's UK and Japanese growth forecasts - despite significant monetary policy moves - the outlook for the advanced countries is best described as a low-growth, muddle-through path. Advanced country growth over 2016 to 2018 will be hardly any better than the lacklustre 1.5% annual average growth rate seen over 2011 to 2015. Moreover, downside risks to advanced country growth have increased. "The rise in populism seen in many advanced countries could be a precursor to increased trade-protectionism and growing fragmentary tensions in the eurozone, both of which would increase uncertainty and damage prospects for private sector investment," added Coulton. Meanwhile, the capacity of central banks to counter adverse growth shocks may be falling. The implications of low and negative interest rates for bank profitability, the increasing complexity of central bank easing announcements, reductions in interest income for savers and market distortions are complicating the transmission of unconventional monetary easing to the economy. Furthermore, the historically unprecedented nature of negative nominal interest rates may be limiting the benefits of central bank easing announcements on inflation expectations. Rising political pressures and concerns about the effectiveness of monetary easing have contributed to growing support among policy makers for fiscal stimulus as a means of restoring growth. A wider shift to fiscal easing is increasingly apparent in the numbers and while its effectiveness may be hindered in some countries by high and rising public debt levels, a co-ordinated fiscal reflation is likely to have growth benefits, at least in the short term. The Fed is likely to be the only major central bank tightening monetary policy in the near term as it lays the groundwork for a December rate rise. With unit labour costs and core inflation measures suggesting underlying inflation close to the Fed's target and the labour market holding up, the conditions look to be in place for a continuation of gradual normalisation in the Federal Funds Rate. The ECB is expected to extend its quantitative easing programme beyond its current scheduled end-date of March 2017, and will likely need to adjust the limits on bond purchases. The new monetary policy approach adopted by the Bank of Japan (BOJ) opens the door for further cuts in the policy rate, taking it deeper into negative territory. This will allow the BOJ to steepen the yield curve while it varies its asset purchases to hold 10-year JGB yields flat at around 0%. We now forecast the BOJ policy rate will fall to -0.5% by end-2017. In the UK, the Bank of England's (BoE) aggressive easing package in early August has had a positive impact on sentiment. With recent UK data slightly better than expected, the BoE is unlikely to follow through on forward guidance to cut rates again before year-end. Having been the main source of downside risk for global growth over the last couple of years, emerging market growth pressures have eased somewhat recently. "It is too soon to say the BRICs are back, but the macro picture in the big emerging markets is certainly steadying," said Coulton. Most importantly, China's efforts to stabilise growth in the face of a sharp slowdown in exports and private-sector investment look to have gained traction. Russia's economy looks to be stabilising after massive import compression, real wage adjustment and fiscal tightening saw domestic demand plummet in 2015. In Brazil, the impeachment of President Rousseff and installation of a new leadership team have renewed focus on fiscal reforms, which should support confidence and help the economy stabilise by year-end. The GEO is available at www.fitchratings.com or by clicking the link above. Notes for Editors: Fitch's Economics team, led by Chief Economist Brian Coulton, analyses global macroeconomic trends and their impact on credit markets around the world. The team publishes global macroeconomic research, forecasts and commentary focusing on 20 major advanced and emerging economies. The Global Economic Outlook, the flagship bi-monthly publication of Fitch's Economics team, and other global economic research and commentary are available at www.fitchratings.com/sovereigns/economics Contact: Brian Coulton Chief Economist Managing Director +44 20 3530 1140 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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