Fitch lowers world growth outlook on high inflation due to Russia-Ukraine war

The outlook for global GDP growth deteriorated significantly as inflation challenges intensified and Russia’s invasion of Ukraine threatened global energy supplies, Fitch Ratings said in the recently released 2022 Global Economic Outlook.

Fitch sees world GDP growth reducing by 0.7 percentage points (pp) to 3.7% in 2022, while noting sharp upward revisions to inflation forecasts.

The rating agency revised down world growth for 2023 by 0.2 pp to 2.8%.

“Global inflation is back with a vengeance after an absence of at least two decades,” said Brian Coulton, Chief Economist at Fitch Ratings.

Additionally, Russia’s invasion of Ukraine and the subsequent economic sanctions on Moscow have put global energy supplies at risk, the report noted, adding that the sanctions seem unlikely to be rescinded soon.

Russia supplies around 10% of the world’s energy, including 17% of its natural gas and 12% of its oil. The jump in oil and gas prices will add to industry costs and reduce consumer real incomes, Fitch said.

Fitch also cut the eurozone GDP growth forecast for 2022 by 1.5 pp to 3.0% and the US by 0.2 pp to 3.5%.

“This reflects the drag from higher energy prices, but also a faster pace of US interest rate hikes than previously anticipated,” the report said.

Russia supplied around a quarter of the eurozone’s primary energy consumption in 2019, Fitch said, adding that while US exposure to Russian energy is much lower but the rise in world oil prices is adding to the inflation problem.

The agency expects US Consumer Price Index (CPI) inflation to peak at 9% and average 7% for the year as a whole.

“The Fed had already turned hawkish before the invasion of Ukraine. We now expect a total of seven rate hikes in 2022 and the Fed funds (upper) rate getting back to 3% by 2023-end,” Fitch said.

“The ECB has also flagged an earlier end to asset purchases in Q3 2022, and we now expect them to raise the main refinancing operations rate by 25 basis points in Q1 2023,” it added.

The People’s Bank of China is, by contrast, in easing mode with inflation still low. Further interest rate and reserve requirement ratio (RRR) cuts and significant fiscal easing is expected.

“But with risks to the near-term consumption outlook from COVID-19 restrictions and the property market weak, we forecast only 4.8% growth, below the official target,” Fitch said.