Global GDP call trimmed as rate hikes loom larger

Amid growing concerns about global inflation and its impact on monetary policy, Fitch Ratings is trimming its forecast for global GDP.

In a research note, the rating agency revised its global forecast for 2021 down by 0.3 percentage points to 5.7%, and cuts its forecasts for the U.S., Japan and Germany.

Despite the downgrade, Fitch said that the forecast would still represent the strongest growth since 1973. “We are far from stagflation,” the note said.

The downward revisions were driven by supply chain disruptions that are limiting growth potential and helping stoke inflation, which may accelerate expected interest rate hikes.

“The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization,” the note said.

Demand has rebounded strongly, but hasn’t been matched by improved output, Fitch added: “Supply bottlenecks resulted in real GDP expanding by less than expected in 3Q21, with prices increasing by more than anticipated.”

“There are now signs that price-level shocks related to pandemic shortages are starting to morph into ongoing inflation. With monetary policy settings still super-loose, this is worrying central bankers,” said Brian Coulton, chief economist with Fitch.

As a result, Fitch now expects the U.S. Federal Reserve to raise interest rates in September next year, and for the Bank of England to hike later this month — “both far sooner than we had expected.”

While the omicron variant represents a downside risk to growth, it could also adversely affect supply leading to further price increases, “implying risks if central banks delay normalization,” Fitch noted.

The rating agency said that prices are expected to stabilize in 2022 “as spending switches back to services, strong investment boosts goods supply, and fiscal stimulus unwinds.”

Fitch also trimmed its forecast for 2022 from 4.4% to 4.2%, noting that “this primarily reflects a more intense slowdown in China.”Global GDP call trimmed as rate hikes loom larger

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.