Friday 29 Mar 2024
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KUALA LUMPUR (Dec 7): Fitch Solutions Country Risk & Industry Research has forecast global economic growth to slow from a multi-decade high of 5.5% in 2021 to 4.1% in 2022 and 3.3% in 2023, which would be broadly in line with the five-year pre-Covid-19 pandemic average of 3.1%.

In a report on Monday (Dec 6), the firm said as had been the case over most of the past 12 months, its 2022 forecast remains below the Bloomberg consensus estimate of 4.4%, although the consensus seems to be converging slightly lower.

It said the latest Purchasing Managers' Index (PMI) data showed that economic momentum remained robust across developed markets and emerging markets (EMs), with the number of major economies with PMI readings above the crucial 50 mark picking up in recent months.

However, it said several developments recently emerged, adding downside risks to its 2022 growth forecast.

These include the new Covid-19 variant known as Omicron, more hawkish stances by central banks and greater financial market volatility, it said.

Omicron

Fitch Solutions said the scientific community had, however, not yet confirmed whether or not vaccines will be less effective against the new strain or whether Omicron causes more severe symptoms.

It said some economies had already implemented restrictions.

“Should vaccine effectiveness prove to be lower or symptoms prove to be more severe than Delta, we would expect to see stricter restrictions rolled out across many economies, with negative global growth implications via supply chain issues and lower consumption and investment.

It said by contrast, should Omicron’s symptoms prove less severe than Delta’s, then the new strain displacing Delta could actually reduce the overall epidemiological risk.

“That said, it is still too early to tell, and many governments have responded cautiously, with many reintroducing travel restrictions,” it said.

Second headwind to global growth

Fitch Solutions said although it still only expects one 25-basis point (bps) US rate hike in 2022, US Federal Reserve (Fed) chair Jerome Powell signalled a more hawkish tone in recent weeks, suggesting that tapering could be faster than expected and opening up the door to a more aggressive pace of interest hikes.

“Markets are currently pricing in 50bps worth of hikes in 2022, which points to upside risks to our forecasts.

“Expectations for more stubborn inflationary pressures and a more hawkish Fed would place additional pressure on central banks around the world to tighten more aggressively as well, which could weigh on global growth,” it said.

Third headwind

“The combination of the Omicron variant and hawkish comments by central bankers has caused high-yield bond spreads to widen — a decline in global markets, with US equities falling about 4%-5% and oil prices falling by 15% since late November.

“In addition, the US dollar has been strengthening in recent weeks, putting downside pressure on EM currencies, which were already under pressure from a slightly more hawkish Fed, weaker commodity prices and volatility from the currency crisis in Turkey,” said Fitch Solutions.

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