Unrelenting global inflation pressures continue to intensify, with increasingly adverse implications for the growth outlook.
Recent Covid-19-related lockdowns in China are adding to global manufacturing supply-chain pressures.
Energy and food supply disruptions from the Russia-Ukraine war are having a swifter impact on European inflation than expected.
Inflation pressures are also building in the services sector, particularly in the US and UK, where tight labour markets are boosting nominal wage growth.
Inflation forecasts have been revised up widely, particularly for Europe in second half of 2022.World Growth Prospects Deteriorate Fitch Ratings’ has cut its world GDP growth forecast for 2022 by 0.6 percentage points since the March 2022 Global Economic Outlook (GEO) to 2.9 percent.
The biggest revision is to China where we now expect growth to fall to 3,7 percent this year, down from 4,8 percent in March.
We have lowered our forecasts for growth in the US by 0,6 percentage points to 2,9 percent and the eurozone by 0,4 percentage points to 2,6 percent.
We have cut world growth in 2023 by 0,1 percent points to 2,7 percent. The lockdown in Shanghai will cause China’s GDP to fall in sequential quarterly terms in Q2 and with the ‘dynamic-zero’ Covid-19 policy still in place, we do not expect there to be a swift bounce back.
Eurozone consumers will experience a greater drag on real incomes from inflation, and German industry is being affected by supply-chain disruptions and the China slowdown.
The US economy has near-term momentum, with consumer spending supported by strong growth in jobs and nominal wages. But growth is set to slow from mid-2023 to barely positive rates in quarterly terms due to aggressive monetary tightening. Inflation challenges have become so pronounced that central banks are being forced to respond, abandoning prior forward guidance.
The risk of inflation becoming embedded as wage-price dynamics develop and price expectations rise is pronounced.
Labour markets are very tight in the US and UK, where wage inflation is high and rising as workers resist real wage cuts amidst high job turnover.
We now expect the Fed to raise interest rates to 3 percent by Q4 and to 3,5 percent Q1 in 2023, above its estimates of the neutral rate and hence to a ‘restrictive’ stance.
We also now expect the Bank of England (BOE) to raise rates to 2 percent by Q4 and 2,5 percent by Q1 in 2023.
The pace of wage growth has also risen in the eurozone, though only to 2.8 percent. With near-term inflation much higher, we now expect the ECB to raise rates by 100 basis points this year followed by 50 bp in 2023. We forecast the ECB main refinancing rate at 1.5percent by Q2 in 2023, close to ECB estimates of the neutral range. — Fitch Ratings.