World Growth Outlook Improves, but Inflation Is Showing Persistence: Fitch Ratings

Near-term world growth prospects have improved and Fitch Ratings has raised its 2024 global GDP growth forecast by 0.3pp to 2.4% in its latest Global Economic Outlook (GEO) published today. This reflects a sharp upward revision to the US growth forecast to 2.1%, from 1.2% in the December 2023 GEO.

The revision to the US outweighs a marginal cut to our China 2024 growth forecast - to 4.5% from 4.6% - and a small revision to our eurozone forecast, to 0.6% from 0.7%. We have revised up our growth forecast for emerging markets excluding China by 0.1pp to 3.2%, with forecasts raised for India, Russia and Brazil.

Fitch expects world growth in 2025 to edge up to 2.5% (unchanged from before) as the eurozone finally recovers on a pick-up in real wages and consumption - but US growth slows.

An unprecedented pro-cyclical widening in the US fiscal deficit in 2023 boosted domestic demand and helped explain the surprising resilience of GDP growth. But we expect the fiscal impulse to fade this year and household income growth to slow. And with lagged effects from last year’s monetary tightening still to come through as real interest rates rise, we expect quarter-on-quarter growth to slow to a significantly below-trend rate later this year.

The eurozone continues to stagnate, with Germany’s recession weighing on France and the rest of the bloc. The German economy faces structural growth constraints but it has also been hit by a string of major shocks that are unlikely to be repeated. Growth should pick up in the medium term as the ECB cuts rates, world trade recovers and the impact of the energy shock fades.

China’s property collapse continues unabated – housing sales now look likely to fall sharply again this year – and evidence of deflationary pressures is rising. But fiscal easing is being stepped up materially and this has cushioned the impact on the GDP forecast.

US core inflation momentum has recently picked up and we have raised our end-2024 US CPI inflation forecast by 0.3pp to 2.9%. Better progress has been made in reducing core inflation in the eurozone but, as in the US, services and wage inflation remain uncomfortably high from the perspective of achieving the inflation target. The jump in shipping costs is adding upside risks to core goods inflation.

We expect both the US Federal Reserve and ECB to cut rates three times, by a total of 75bp, by year-end. But both central banks want to see more evidence that recent disinflation progress is durable before starting out on the policy-easing process. We have pushed back the date of the first Fed cut to July from our previous expectation of June. We have also pushed back the date of the first ECB cut to June from April.

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