KUALA LUMPUR (March 18): Global growth prospects are improving as fiscal support is stepped up sharply and economies adapt to social distancing and vaccination roll-out gathers momentum, said Fitch Ratings.

In its latest Global Economic Outlook (GEO) released today, Fitch now expects global gross domestic product (GDP) to expand by 6.1% this year, revised up from 5.3% in its December 2020 GEO.

In a statement, Fitch said GDP out-turns were stronger than expected in the fourth quarter of 2020 (4Q20), particularly in Europe and emerging markets (EMs) — and world GDP declined by 3.4% in 2020 as a whole, compared to the previous forecast of a 3.7% decline.

It said world GDP is now expected to be 2.5% higher in 2021 than in the pre-pandemic year of 2019.

Fitch chief economist Brian Coulton said the pandemic is not over, but it is starting to look like the world has entered the final phase of the economic crisis.

Fitch now forecasts US GDP growth at 6.2% in 2021 (revised up from 4.5%), China at 8.4% (from 8%) and the eurozone at 4.7% (unchanged).

Growth in emerging markets excluding China is forecast at 6% (up from 5%).

The rating agency said the main driver of its global forecast revision was the much larger-than-expected fiscal stimulus package recently passed in the US.

It said the US$1.9 trillion (RM7.81 trillion) price tag represents more than 2.5% of global GDP, adding that fiscal support had a powerful cushioning impact in 2020.

Fitch highlighted that further fiscal easing had also been announced in the UK, Italy, Japan, Germany and India, while the EU's Next Generation EU recovery fund (NGEU) should provide a sizeable boost to eurozone growth in 2022.

It said China is the only major economy that is starting to normalise macroeconomic policy settings, where the fiscal deficit is being scaled back and credit growth is slowing as the economic recovery matures.

Fitch said unemployment forecasts for the major economies had been cut but job market recoveries continued to lag.

It said the leisure and transport (L&T) industries are labour-intensive and still afflicted by social distancing.

US employment was still 6.1% below pre-pandemic levels (compared to GDP which was 2.4% lower), while L&T accounted for more than one-third of furloughed workers in the EU, it said.

The rating agency said vaccine roll-outs had gained momentum, particularly in the UK and US.

It said the eurozone has had a slower start but the programme should accelerate in 2Q21.

“It is still reasonable to assume that the health crisis will ease by mid-year, allowing social contact to start to recover. But immunisation delays or problems remain key downside risks to the forecast.

“Improving growth prospects, commodity price increases and short-term supply constraints in some manufacturing sectors have renewed focus on inflation risk. US bond yields are up by 60 basis points (bps) this year,” it said.

Fitch said the rate of headline US inflation could rise above 3% year-on-year (y-o-y) in April but underlying inflation will increase much more gradually given the labour market slack.

It said the US Federal Reserve (Fed) is focused on unemployment, more tolerant of higher inflation and will remain patient.

Core inflation will stay well below the target in the eurozone and the European Central Bank (ECB) will continue to purchase assets through 2022, it said.