scorecardresearchFitch Ratings rings alarm on inflation, cuts global growth forecast; lowers Indi

Fitch Ratings rings alarm on inflation, cuts global growth forecast; lowers Indi

Updated: 22 Mar 2022, 01:35 PM IST
TL;DR.

We have also lowered our world growth forecast for 2023 by 0.2pp to 2.8 percent, reflecting the lagged effect of faster-than-anticipated monetary policy tightening this year, said the ratings agency.

Fitch has cut forecasts for most EMs. These cuts in forecasts have been larger for net oil importers, including India, Turkey and Poland.

Fitch has cut forecasts for most EMs. These cuts in forecasts have been larger for net oil importers, including India, Turkey and Poland.

Global rating agency Fitch Ratings has cut its global growth forecast highlighting that elevated inflation in the wake of a sharp rise in commodity prices, thanks to the Ukraine war, is a big risk for the global economy.

Fitch Ratings has cut its world GDP growth forecast for 2022 by 0.7pp to 3.5 percent, with the eurozone cut by 1.5pp to 3 percent and the US by 0.2pp to 3.5 percent which reflects the drag from higher energy prices and a faster pace of US interest rate hikes than anticipated.

"World GDP grew rapidly at 5.9 percent in 2021 but the outlook has darkened as inflation challenges have increased and Russia’s invasion of Ukraine and the resulting sanctions have disrupted global energy markets. We now expect world growth to slow to 3.5 percent in 2022, revised down from 4.2 percent in the December 2021 Global Economic Outlook (GEO)," Fitch Ratings said in a report.

"We have also lowered our world growth forecast for 2023 by 0.2pp to 2.8 percent, reflecting the lagged effect of faster-than-anticipated monetary policy tightening this year," said the rating agency.

Fitch expects growth in emerging markets (EM), excluding China, to slow to just 2.5 percent in 2022 which partly reflects the anticipated 8 percent decline in Russian GDP as financial conditions tighten sharply and non-energy trading relationships are disrupted.

The India Cut

Fitch has cut forecasts for most EMs. These cuts in forecasts have been larger for net oil importers, including India, Turkey and Poland.

Fitch has lowered its growth forecast for India for FY23 to 8.5 percent (-1.8pp) on sharply higher energy prices.

"Tighter financial conditions and weaker global demand have generally outweighed any benefits to EM commodity exporters from the surge in commodity prices," Fitch said.

Fitch underscored that even the top central banks such as the US Fed may not be able to support growth this time. It anticipates seven interest rate rises (of 25bp each) from the Fed and four hikes from the Bank of England (BOE) in total in 2022. The European Central Bank (ECB) is also now expected to begin raising interest rates, albeit not until Q1FY23, Fitch said.

"Inflation challenges and supply shocks could take a much heavier toll on world GDP growth if they prompt much more abrupt Fed tightening, push oil prices to $150 a barrel (bbl) and result in significant eurozone energy rationing," said Fitch Ratings.

Article
Fitch expects world growth to slow to 3.5 percent in 2022, revised down from 4.2 percent in the December 2021 Global Economic Outlook.

Inflation to remain high

Fitch has raised its inflation forecasts also. It expects headline CPI inflation to average around 7 percent in the US in 2022, up from 4.5 percent in the December Global Economic Outlook. It has revised up eurozone average inflation to 5 percent from 2.6 percent, and UK inflation to 6.6 percent from 4.5 percent.

For India, Fitch sees inflation strengthening further, peaking above 7 percent in the third quarter of the year 2022, before gradually easing.

"We expect inflation to remain elevated throughout the forecast horizon, at 6.1 percent annual average in 2021 and 5 percent in 2022," Fitch said.

The rating agency highlighted that the Reserve Bank of India has prioritised the economic recovery over tackling inflation amid a still-large output gap and Fitch expects the repo rate to rise to 4.75 percent by December, from 4 percent currently.

"The reverse repo rate – which has become the effective driver of money market rates since the start of the pandemic – is likely to be increased by a larger amount," Fitch said.

Article
India's retail inflation hit its fastest pace in eight months in February owing to higher prices of food and manufactured goods.
First Published: 22 Mar 2022, 10:40 AM IST