The downgrade reflects a significant weakening of the UK's public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent. The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship.
The coronavirus crisis is crushing global GDP growth according to Fitch Ratings in its latest quarterly "Global Economic Outlook" (GEO). We have nearly halved the Fitch baseline global growth forecast for 2020 - to just 1.3% from 2.5% in the December 2019 GEO. The revision leaves 2020 global GDP USD850 billion lower than in the previous forecast. Related Report: Global Economic Outlook
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The ECB's EUR750 billion bond-buying reduces refinancing risk for eurozone sovereigns and will help facilitate their fiscal responses to the coronavirus crisis, Fitch Ratings says. In line with our global approach, we will aim to assess how far urgent fiscal measures could lead to medium-term deteriorations in public finances when incorporating crisis responses into our sovereign credit analysis.
Stubbornly low inflation in the eurozone (EZ) has become partly self-fulfilling with declining inflation expectations and strong statistical evidence of 'persistence' (past inflation affecting future inflation) helping to explain why EZ core inflation has remained so low in recent years. Econ
Computer and electronic components face the biggest risk of global supply-chain disruptions stemming from China's coronavirus outbreak. Chinese factory shut-downs will affect output in global industries reliant on Chinese inputs even where there is no direct exposure to lower demand in China.
Weak GDP growth in 4Q19 and a decline in industrial activity weighed on some of the world's 20 biggest economies. Quarterly GDP contracted in Japan, France and Italy, while the UK's, Germany's and Mexico's were flat. They were partly dragged down by a global manufacturing slump, although country-specific factors have also had a role to play.
Fitch Ratings' newly developed GDP "Nowcast" estimates suggest that world GDP expanded solidly at the beginning of 1Q20, prior to the rapid spread of the coronavirus. The Nowcasts use monthly data such as business and consumer surveys, as well as hard data such as exports and industrial production.
Steady and broad-based growth in the US service sector is providing a key offset to manufacturing slowdown. Our economics team's latest chart of the month shows that real value-added in the US private services sector has been growing at a solid pace over the last 18 months, steadily above 2.5% y-o-y on a quarterly basis, in sharp contrast to the collapse in manufacturing output growth.
Following the global easing in monetary policy conditions, several frontier market economies saw rising FX reserves and interest-rate cuts in 2H19, says Fitch Ratings in its latest Frontier Vision chart pack.
A combination of slowing economic growth, sustained low interest rates and unprecedented levels of indebtedness will broadly influence the global credit outlook in 2020, says Fitch Ratings. The aggregate rise in global indebtedness in 2019, which occurred as monetary authorities reversed course on rate hikes, will increase vulnerabilities for key sectors in the event of a more rapid than expected economic downturn.
In conjunction with the Institute of International Finance and Refinitiv, Fitch Ratings is delighted to invite you for a breakfast seminar at the 2020 Davos Summit in Switzerland for a discussion on our Global Economic Outlook.
Moderator: Sonja Gibbs, Managing Director and Head of Sustainable Finance, Institute of International Finance
The outsized service sector in France has cushioned its economy and contributed to a shallower slowdown than seen in its euro zone peers over the last 18 months, according to Fitch Ratings' latest Chart of the Month. With a service sector accounting for close to 80% of total output, France has been less exposed to the global manufacturing slump that has taken a particularly heavy toll on Germany and Italy.
The "Phase One" trade deal reported to have been reached between US and Chinese negotiators offsets much of the damage done to global trade and activity prospects from earlier US plans to raise tariffs in October and December, according to Fitch Ratings. Nevertheless, trade tensions remain high and renewed escalation remains a significant risk.
The Fed has recently stepped in to ameliorate repo market volatility; however, the structural issues leading U.S. banks to hoard cash seems likely to persist, according to a new dashboard report from Fitch Ratings. This may continue to present challenges for the Fed in assessing the level of reserves required to implement monetary policy under the ample reserves operating framework.
The resilience of the service sector and consumer spending growth in the advanced economies should help global growth stabilise next year, after a sharp decline in 2019, says Fitch Ratings in its new Global Economic Outlook (GEO).
The federal government's two primary tools to stimulate the economy, fiscal and monetary policy, may be constrained relative to previous cycles, potentially exacerbating cyclical US public finance (USPF) funding deficits and delaying the rebuilding of issuer reserves during and coming out of the next downturn. More limited possibilities for aggressive macro policy easing could culminate in a slower path of recovery after any future recession.
Fitch Ratings' updated macro-prudential risk indicators (MPI scores) suggest a record high number of markets have low vulnerability to one source of systemic stress. This is the low real credit growth that continues to prevail in most markets, and is the key determinant of MPI scores, according to Fitch's latest Macro-Prudential Risk Monitor. We expect that credit growth trends in EM and DM markets will be supported by easier global monetary policy.
The Indian economy is being held back by a large squeeze in credit availability emanating from non-bank financial companies (NBFCs). Our economics team's latest Chart of the Month shows that, assuming the sluggish pace of lending is maintained throughout the year, total new lending will amount to only 6.6% of GDP in the fiscal year 2019-2020, down from 9.5% in the previous fiscal year.
Weak investment may help explain the secular slowdown in wage growth over the last two decades, a development that has hampered central banks' ability to meet inflation targets and contributed to rising inequality, says Fitch Ratings' economics team.
Germany's heavy dependence on exports means that the slump in world trade and manufacturing has taken a much heavier toll on growth than in other G7 economies. The contribution of gross export demand to German GDP growth has fallen very sharply over the last two years - as highlighted in Fitch's economics team's latest Chart of the Month - and has left the economy on the brink of recession.
Fitch has introduced new measures of the output gap - or the degree of economic "slack" - for the 10 advanced economies (DM10) covered in its Global Economic Outlook (GEO). These measures have been built upon the signals sent both by the financial cycle, specifically the role of credit and asset prices, and direct survey-based measures of slack in the labour and product markets.
The shift in the direction of global monetary policy in the last six months has been more broad-based across geographies than in any period since 2009, with more than a third of central banks covered in the Bank for International Settlements' (BIS) database having eased policy in the past six months.
Private sector financial surpluses in all of the largest eurozone (EZ) economies limit the risk that weakening external demand will be amplified by sharp downward corrections in domestic demand, says Fitch Ratings' economics team.
Most post-war US recessions have been preceded by deteriorating private-sector financial imbalances, but these conditions are not in place currently as shown by Fitch Ratings' economics team's latest Chart of the Month.
The imposition by the US of 25% tariffs on the remaining USD300 billion of imports from China would reduce world economic output by 0.4pp in 2020, Fitch Ratings says. Global GDP growth would slow to 2.7% this year and 2.4% next year, compared with our latest "Global Economic Outlook" baseline forecasts of 2.8% and 2.7% respectively.