Surprising strength has Fitch boosting global forecast

With the global economy holding up better than expected, Fitch Ratings boosted its world GDP forecast, but warned that interest rates will likely stay higher for longer, weighing on 2024.

In its latest forecast report, the rating agency raised its 2023 call for global GDP to 2.4%, up from its previous call for 2.0% growth, noting that economic activity is proving more resilient than anticipated.

Fitch’s biggest upgrades have been in emerging markets “where incoming data have been a lot stronger than expected,” it said.

For instance, its forecast for emerging market GDP (excluding China) has been revised up to 2.9% from 2.0%, “with Brazil, India, Mexico and Russia seeing substantive improvements,” it said.

At the same time, its forecast for China has been bumped up to 5.6% from 5.2%, thanks to a “swifter-than-expected reopening rebound” in the first quarter.

“The recovery has faltered somewhat in recent months but consumption continues to normalize and macro policy is starting to be eased,” Fitch said.

Alongside these revisions, the rating agency also bumped up its U.S. growth forecast for 2023 to 1.2% from 1.0%, noting that “consumption and jobs growth remain robust.”

Fitch still expects the U.S. to ultimately tip into recession, however this expected contraction has been pushed out to the fourth quarter of this year, and the first quarter of 2024.

As a result, the forecast for 2024 has been cut to 0.5% from 0.8% .

Similarly, Fitch lowered its global GDP forecast for 2024 to 2.1%, down from 2.4%, thanks to the lingering effects of higher interest rates and the impact of stronger emerging market growth this year.

“With monetary policy adjustments and their impact on the economy proving more protracted, the global growth outlook for 2024 has deteriorated,” it said.

The rating agency’s forecasts for Europe remain unchanged at 0.8% and 1.4%, in 2023 and 2024, respectively.

The numerous GDP revisions come against the backdrop of a higher-rate forecast too.

“Headline inflation has fallen, but core inflation remains stubbornly high, perpetuated by rising services inflation. Wage growth in the U.S. and Europe far exceeds rates consistent with inflation targets as labour markets remain tight,” Fitch said.

As a result, it now expects both the U.S. Federal Reserve Board and the European Central Bank to raise rates in the coming months, to peaks of 5.75% and 4.5%, respectively.

“There was no immediate credit crunch in the aftermath of recent U.S. banking stresses but bank funding costs are rising. And with central bank quantitative tightening policies withdrawing liquidity, there is a risk of sharper-than-expected credit tightening hitting growth,” it said.

Central banks in the developed markets aren’t expected to cut rates until 2024, whereas Brazil and Mexico are expected to cut rates this year, and China has already lowered rates, Fitch noted.