Global Growth Outlook Improves, but Rate Hike Impact Still Ahead

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March 14, 2023/Fitch Ratings

Global growth prospects for 2023 have improved significantly since December, says Fitch Ratings in its latest Global Economic Outlook (GEO) report, but the impacts of rate hikes on the real economy still lie ahead and are likely to push the US economy into recession later this year.
The improvement in the near-term outlook reflects China’s post-Covid-19 reopening, a material easing of the European natural gas crisis, and surprising near-term resilience in US consumer demand. This is the first upgrade to Fitch’s year-ahead world growth forecasts since the start of the Russia-Ukraine war.
Fitch now forecasts world growth in 2023 at 2.0%, revised up from 1.4% in the December 2022 GEO. We have raised China’s 2023 growth forecast to 5.2% from 4.1% in December, eurozone growth to 0.8% from 0.2% and US growth to 1.0% from 0.2%.
But we have lowered global growth in 2024 to 2.4% from 2.7% to reflect the lagged impact of rapid Fed and ECB interest rate hikes.
“Central banks are now taking away the punchbowl quite quickly. It is only a matter of time before the impact on the real economy becomes much more visible,” said Brian Coulton, Chief Economist at Fitch Ratings.
China’s abandonment of Covid-19 pandemic restrictions at the turn of the year has been followed by swift improvements in mobility indicators and business surveys. Contact-intensive consumer spending – curtailed by lockdowns in 2022 – is rebounding quickly, but the property sector remains weak and exports are slowing.
The European gas crisis has eased significantly in recent months with gas supply holding up, inventories improving relative to seasonal norms and wholesale prices falling dramatically. This is helping eurozone growth prospects and easing headline inflation pressures.
The US economy has more near-term momentum than we anticipated, with robust employment and consumption growth at the start of the year. Household income growth is holding up and savings buffers built up in the pandemic will support spending for a while.
Headline inflation looks to have peaked, but core inflation is stubbornly high and the Fed and ECB have become more concerned about inflation becoming entrenched. Labour market imbalances – a source of wage pressure – are not improving.
We forecast the Fed Funds to peak at 5.5% and ECB’s Main Refinancing Operations rate at 4.0% in June, upward revisions of 50bp and 100bp, respectively, since December. Core inflation hit a 40-year high in Japan and the Bank of Japan is expected to raise the 10-year yield cap by another 50bp to 1%.
Monetary tightening is taking longer to slow US demand than expected, but we believe that 525bp of rate rises in just 15 months will ultimately weigh heavily on activity. We still forecast a US recession, albeit starting in 3Q23 – several months later than in our previous forecast and a few months after the peak in Fed Funds.

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