Expect a slow economic recovery: Fitch

Despite signs that the economic disruption inflicted by the Covid-19 outbreak peaked in April and has eased since, Fitch Ratings still expects global GDP to drop by 4.6% this year.

The rating agency issued its latest global forecast, which highlights growing evidence of improvements in economic activity as pandemic-driven lockdowns ease.

“Signs of sequential improvements in activity have become clearer over the past month, lending confidence to the view that April marked the trough of the coronavirus-related recession,” said Brian Coulton, chief economist at Fitch.

Following a sharp drop in global output this year, Fitch expects a comparable bounce back in 2021.

The rating agency now forecasts global GDP to rise by 4.9% next year, followed by above-trend growth of 3.4% in 2022, “as the impact of policy support persists and the output gap closes.”

“Nevertheless, the risk of a resurgence of the virus and renewed nationwide lockdowns — which could severely interrupt the expected economic recovery path — remains high,” Coulton noted.

For Canada, the rating agency predicts a 7.1% drop in GDP this year, followed by a 3.9% rebound in 2021 and 2.8% growth in 2022.

Throughout the forecast period, the Bank of Canada is seen holding rates at current levels.

Fitch forecasted that U.S. GDP won’t return to pre-pandemic levels until the second quarter of 2022, and European GDP won’t return to pre-pandemic levels until Q4 2022.

“Elevated job uncertainty, along with ongoing social distancing behaviour is likely to weigh heavily on household spending over the next 18 months, while firms are likely to cut back sharply on investment plans after such a huge revenue shock,” Coulton said.

“This means that the climb back to pre-virus GDP levels will, despite massive stimulus, be much slower than the recent rapid descent,” he added.

Fitch also stressed that its global forecast is based on the assumption that governments will not reimpose strict lockdowns in response to a resurgence of the virus.

Instead, Fitch assumes that governments will take more targeted approaches to renewed outbreaks, based on increased testing and tracking.

This also assumes ongoing travel restrictions, limits on large gatherings and voluntary social distancing.

However, Fitch cautioned that the risk of renewed lockdowns and stricter distancing behaviour is still “very high.”

“At the global level the number of new cases remains high and some major economies, including the U.S. and Brazil, have yet to see the virus curve flatten,” the rating agency said.

In Fitch’s downside scenario, driven by a major resurgence in the virus, global GDP would fall by 9% in 2020, with declines of around 12% in the U.S. and Europe.

“GDP would fail to return to its pre-virus levels until the middle of the decade on this basis,” Fitch said.