The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalisation, Fitch Ratings has said.
The agency, which stated this in its latest Global Economic Outlook (GEO) released at the weekend, noted: “A strong recovery in global aggregate demand in nominal terms over the past year has not been matched by an equal recovery in output,” adding that “supply bottlenecks resulted in real GDP expanding by less than expected in Q3’21, with prices increasing by more than anticipated.”
It pointed out that monetary policy responses are becoming more divergent, with ECB interest rates still likely to remain on hold through 2023 and the Chinese Central Bank expected to cut interest rates in 2022.
According to Fitch’s Chief Economist, Brian Coulton, “there are now signs that price level shocks related to pandemic shortages are starting to morph into on-going inflation.
With monetary policy settings still superloose, this is worrying central bankers.” The agency noted the sharp rise in global consumer goods prices since March primarily reflects a surge in goods demand, fuelled by stimulus measures, particularly in the U.S. It predicted that “goods prices should stabilise in 2022 as spending switches back to services, strong investment boosts goods supply, and fiscal stimulus unwinds.”
The rating agency said it now expect the Fed to raise interest rates in September 2022 and the Bank of England (BOE) later this month, both far sooner than it had expected. “High inflation is raising policy tensions.
The omicron COVID-19 variant concern represents a downside risk to growth but could adversely affect supply leading to further price increases, implying risks if central banks delay normalization,” it said.
The agency said a more intense slowdown in China led it to cut its world growth forecast for 2022 to 4.2 per cent from 4.4 per cent. Noting that the policy response in China has been slower than expected with just two cuts to the reserve requirement ratio announced this year, the agency said that while it anticipates more easing announcements in the next few months, it now expect China’s growth to fall to 4.8 per cent in 2022 from 8.0 per cent in 2021.
On growth for other economies, it said: “We have revised US growth in 2021 to 5.7 per cent (from 6.2 per cent in the September GEO) and cut 2022 growth to 3.7 per cent (from 3.9 per cent).
“We also lowered our eurozone growth forecast for 2021 to 5.0 per cent (from 5.2 per cent), but our forecast for 2022 is unchanged at 4.5 per cent. Growth in emerging markets excluding China is forecast at 5.7 per cent in 2021 and 4.6 per cent in 2022, both 0.1pp lower than in September, partly reflecting a sharp deterioration in Brazil’s economic outlook.”
