Risks to global economic growth on the rise according to FitchRatings

Downside risks to growth in advanced economies have risen in recent months, according to Fitch Rating’s bi-monthly Global Economic Outlook (GEO) report.

For the US, the rating agency revised down its 2016 forecast for the pace of expansion in gross domestic product to 1.4% from the 1.8% set out in July’s GEO.

"This year is likely to see the lowest annual growth rate for US GDP since 2009 as oil sector adjustments, weak external demand and the earlier appreciation of the dollar take their toll on industrial demand," said chief economist Brian Coulton.

For the rest of the world's advanced countries, Fitch described the outlook as a “low-growth, muddle-through path.” Despite significant monetary policy moves, the agency’s UK and Japanese growth forecasts, were largely unchanged.

Similarly, Eurozone growth looked likely to have peaked in early 2016, Fitch said.

Their projection for advanced country growth over 2016-2018 was hardly any better than the “lackluster” 1.5% annual average growth rate seen over 2011-15.

"The rise in populism seen in many advanced countries could be a precursor to increased trade-protectionism and growing fragmentary tensions in the Eurozone, both of which would increase uncertainty and damage prospects for private sector investment," added Coulton.

Central Bank policy

The report also highlighted how central banks’ capacity to counter these adverse growth shocks is limited, with the lack of historical precedents for negative nominal interest rates limiting the benefits of central bank easing on inflation expectations.

“The implications of low and negative interest rates for bank profitability, the increasing complexity of central bank easing announcements, reductions in interest income for savers and market distortions are complicating the transmission of unconventional monetary easing to the economy,” said the report.

Aside from concerns about the effectiveness of monetary easing, rising political pressures had also contributed to growing support among policy makers to switch to fiscal stimulus to stimulate growth in the economy.

The effectiveness of this however may be stunted in some countries by high and rising public debt levels. Regardless, a coordinated fiscal reflation is still likely to have growth benefits in the short term.

In the UK, the Bank of England’s (BoE) aggressive easing package in August has had a positive impact. Due to recent UK data proving better than expected, the agency feel it is unlikely that the BoE will follow through on its forward guidance to cut rates again before the end of the year.

Meanwhile in the US, the Fed is most probably the only major central bank tightening monetary policy in the lead up to its December rate rise.

The agency expect the Federal Funds Rate to gradually normalize with core inflation measures being close to the Fed’s target and unit labour costs on the rise.

In Europe, the European Central Bank (ECB) is expected to prolong its quantitative easing programme beyond its current scheduled end-date of March 2017. The ECB is also expected to adjust its limit on bond purchases.

In Japan, the new monetary policy adopted by the Bank of Japan (BOJ) has led to further cuts in the policy rate, “taking it deeper into negative territory”, which the agency forecasts to fall to -0.5% by the end of 2017.This allows the BOJ to steepen the yield curve while it varies its asset purchases to hold 10-year Japanese government bond (JGB) yields flat at around 0%.

Emerging markets

Brazil, Russia, India and China (BRIC) are “steadying” according to Coulton, which is an improvement from them being the main source of downside risk for global growth over recent years.

China’s efforts to stabilise growth in the face of a sharp slowdown in exports and private-sector investment looked to have “gained traction”. Russia’s economy looks to be stabilising after a fall in demand in 2015 following massive import compression, real wage adjustment and fiscal tightening. The impeachment of Present Rousseff and installation of a new leadership team in Brazil have renewed focus on fiscal reforms which should help the economy stabilise by year-end.