The world economy is likely to grow a bit faster in 2023 than Fitch Ratings expected in its June Global Economic Outlook (GEO), but the deepening slump in China’s property market is casting a shadow over global growth prospects, just as monetary tightening increasingly weighs on the demand outlook in the US and Europe, says Fitch in its September 2023 GEO, released today.
Fitch has revised up its forecast for world growth in 2023 by 0.1pp to 2.5%, reflecting surprising resilience so far this year in the US, Japan and emerging markets (EM) excluding China. We have raised US growth by 0.8pp to 2.0%, Japan by 0.7pp to 2.0% and EM ex. China by 0.5pp to 3.4%. This has more than offset a 0.8pp cut to China – to 4.8% – and a 0.2pp cut to the eurozone, to 0.6%. The differential between growth in EM ex. China and developed economies is expected to rise towards historical norms this year partly reflecting the earlier timing of the monetary policy tightening cycle in emerging markets.
However, we have lowered our 2024 world growth forecast by 0.2pp to 1.9% with widespread downward revisions. We have cut the US growth forecast by 0.2pp to 0.3%, the eurozone by 0.3pp to 1.1%, and both China and EM ex. China by 0.2pp to 4.6% and 3.0%, respectively.
The previously hoped-for stabilisation in China’s housing market has failed to materialise and new sales could fall by a fifth this year. Housing is a third of investment and 12% of Chinese GDP and has strong multiplier impacts on the wider economy. Policy easing has been underwhelming to date and export demand is falling.
Rapid US consumption growth has continued this year, despite Federal Reserve tightening, helped by a USD1.2 trillion drawdown of Covid-19 pandemic savings buffers and robust nominal household income growth – as employment and wages have risen quickly. But labour demand has slowed in recent months and wage inflation will ease further as the labour market continues to cool.
In addition to the prospect of slowing labour income, the tightening in credit conditions is becoming clearer, with the US credit impulse turning negative. A downturn in profit growth is also signalling weakening business investment prospects. We still expect a mild US recession, though now anticipate this to occur in 1H24.
The eurozone recovery has stalled in the wake of the energy shock and now faces new external challenges from the slowdown in world trade and China. We now expect Germany’s economy to contract by 0.4% this year. ECB policy tightening is weighing on credit growth.
Better news on disinflation means the Fed is now close to reaching a peak on rates and we expect just one more 25bp hike to 5.75%. But core inflation is still high – particularly in services – and we have pushed back the date of the first Fed rate cut to May 2024.
The ECB is also challenged by stubbornly high core inflation and will not be deterred from a further rise in rates by a weakening economic outlook. The Bank of England is now expected to keep rates higher for longer, as wage inflation stays high despite weak growth. We now expect UK growth to expand by 0.2% in annual terms in 2023 but we still forecast a mild recession in 2H23 as a higher interest burden squeezes household spending.