Fitch Ratings cut world growth forecasts as inflation intensifies due to war


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The outlook for global GDP growth has deteriorated significantly as inflation challenges intensify and Russia’s invasion of Ukraine threatens global energy supplies. Fitch Ratings’ March 2022 Global Economic Outlook sees world GDP growth reduced by 0.7pp in 2022 and sharp upward revisions to inflation forecasts.

“Global inflation is back with a vengeance after an absence of at least two decades. This is starting to feel like an inflation regime change moment,” said Brian Coulton, Chief Economist, Fitch Ratings.

A potentially huge global supply shock that will reduce growth and push up inflation is hitting the post-Covid-19 pandemic recovery Russia’s invasion of Ukraine and the economic sanctions on Russia that have followed have put global energy supplies at risk. Sanctions seem unlikely to be rescinded any time soon.

Russia supplies around 10% of the world’s energy, including 17% of its natural gas and 12% of its oil. The jump in oil and gas prices will add to industry costs and reduce consumer real incomes. Outright shortages and energy rationing are possible in Europe if there is an abrupt halt to Russian supply. Higher energy prices are a given.

Fitch has cut its world GDP growth forecast for 2022 by 0.7pp to 3.5%, with the eurozone cut by 1.5pp to 3.0% and the US by 0.2pp to 3.5%. This reflects the drag from higher energy prices but also a faster pace of US interest rate hikes than previously anticipated. Fitch has revised down world growth for 2023 by 0.2pp to 2.8%.

Russia supplied around a quarter of the eurozone’s primary energy consumption in 2019. This equals the share of OPEC oil output in global primary energy production in 1973. Diversification to other sources will take time. Eurozone inflation will average 5% in 2022 on the rise in EU gas prices . Some fiscal support to cushion the shock is likely.

US exposure to Russian energy is much lower but the rise in world oil prices is adding to what was already becoming a major inflation problem. Consumer goods prices continue to rise sharply and services inflation has hit a 30-year high as rents accelerate and wage growth approaches 6%. Households’ concerns about inflation are rising. We now expect US CPI inflation to peak at 9% and average 7% for the year as a whole.

The Fed had already turned hawkish before the invasion of Ukraine. “We now expect a total of seven rate hikes in 2022 and the Fed Funds (upper) rate getting back to 3% by end-2023. The ECB has also flagged an earlier end to asset purchases in 3Q22 and we now expect them to raise the main refinancing operations rate by 25bp in 1Q23,” Fitch said.

The People’s Bank of China is, by contrast, in easing mode with inflation still low. Further interest rate and reserve requirement ratio (RRR) cuts and significant fiscal easing is expected. But with risks to the near-term consumption outlook from Covid-19 restrictions and the property market weak, we forecast only 4.8% growth, below the official target.

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 USD150 a barrel for a sustained period and were associated with widespread energy rationing in Europe.

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