"The investment slowdown in China and sharp expenditure compression in major commodity producing countries continue to reverberate around the world economy," said Brian Coulton, Chief Economist at Fitch.
Using our "Fitch 20", a proxy for world GDP based on a weighted average of 20 of the largest advanced and emerging market countries, we forecast growth in advanced countries as a whole at 1.7% in 2016 down from 2.1% in December's edition of the GEO. For emerging markets, 2016 growth is now pegged at 4.0%, down from 4.4% in December. The equal revisions for both the advanced and emerging country aggregates breaks the previous pattern of forecast changes, whereby weakening emerging market prospects were associated with much smaller downward revisions to the advanced country outlook. This reflects the fact that external and energy sector shocks are now having a clearer negative impact on advanced economy growth than previously anticipated.
"With emerging markets at the epicentre of these shocks and now accounting for 40% of world GDP it is legitimate to ask whether the world will see, for more or less the first time in recent history, an emerging market led global recession. However, we believe several factors mitigate this risk," Coulton added.
Firstly, labour market conditions in many of the major advanced economies look quite robust. Along with the benefits of lower oil prices on real incomes, this should help support consumer spending in rich countries and cushion the shock. Advanced economies look to be beyond the worst of the private sector deleveraging forces that held back domestic demand growth in the years following the global financial crisis. Furthermore, the impact of fiscal policy on growth in the advanced economies is currently less restrictive than it has been in the last few years.
It is also important to recognise heterogeneity within emerging markets. Among the larger emerging market economies India, Poland, Turkey and South Korea are all large net commodity importers and stand to benefit in real income terms from the fall in commodity prices, as does China. Finally, on China itself, despite the considerable challenges it faces, there look to be sufficient policy levers available and enough diversity in growth drivers to avoid a hard landing in 2016.
Fitch is now assuming the Brent oil price averages USD35 per barrel in 2016 and USD45 in 2017 respectively, down from USD55 and USD65 in December. These revisions reflect a strong inventory build, higher than expected OPEC production in January and deteriorating prospects for world GDP growth.
In Russia, lower oil prices are reducing corporate incomes and have prompted pro-cyclical fiscal policy tightening, while high interest rates and falling real wages are squeezing consumption. Fitch has revised its 2016 forecast down to -1.5% from +0.5% in December. Weakening commodity prices have also been weighing on the outlook in Brazil. However, the latest forecast revision to -3.5% for 2016 (from -2.5% in December ) also reflects heightened political uncertainty and its impact on confidence, deteriorating labour market and credit conditions and the pro-cyclical tightening in macro policy through 2015.
Tighter fiscal and monetary policy settings in the face of weak growth and rising inflation were also a factor in the revision of South Africa's forecast since December (down to 1% from 1.7% in December). Growth in China is expected to be slightly weaker at 6.2% (down from 6.3%) reflecting revisions to external demand, but recent credit data and stepped up policy easing suggest that risks to the 2016 forecast are balanced.
We have revised US growth in 2016 to 2.1% from 2.5% in December reflecting deteriorating export prospects and some broader weakening of demand in 4Q15. Japan's 2016 outlook has been lowered on the surprise weakening of consumer spending in 4Q15. The revisions to global growth also warrant moderate downward adjustments to euro area forecasts.
Overall, we forecast global growth to remain at 2.5% in 2016, the same as 2015. This represents a downward revision of 0.4 percentage points (pps) to 2016 global growth.
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