Fitch Ratings has revised downwards its forecast of global economic growth in 2012, and remains concerned about the ability of  politicians in Europe and the US to resolve financial market tensions.

Fitch now puts growth in the major advanced economies (MAE) at 1.3% in 2011 and expects it to remain weak at 1.2% in 2012, followed by only a modest acceleration to 1.9% in 2013.

Compared with the previous GEO in October, Fitch has revised down its GDP forecasts over the entire forecast horizon to 2013. The agency forecasts global growth, based on market exchange rates, at 2.4% for 2012 and 3.0% in 2013, compared with 2.7% and 3.1% previously.

Mildly negative quarterly growth rates are likely over the next quarters in the eurozone (EZ) and, among its four largest members, Fitch expects only Italian GDP to contract over 2012 as a whole, by 0.5%. However, the outright contraction of the eurozone economy over 2012 is now a one-in-three probability.

The recovery in the US will remain lacklustre in the short run with stronger growth momentum expected from H212 onwards, weighed down by the continued drag from the housing market as well as fiscal tightening equivalent to around 1% of GDP. In line with weak GDP growth in the EZ, the economic outlook has also weakened in the UK, where Fitch has revised down its GDP growth forecasts again to just 0.7% in 2012 and 2.0% in 2013.

In contrast, Fitch expects the economic growth of BRIC countries will remain robust over the forecast horizon, at 6.3% in 2012 and 6.6% in 2013, well above MAE or global growth rates. Nevertheless, in line with the economic cycle of MAEs, China and Russia will slow in the coming years. Brazil and India have already experienced a sharp slowdown this year and are expected to regain some of the lost momentum by 2013.

In Fitch’s assessment downside risks dominate at this current juncture. In particular, financial tensions may intensify further in the EZ. A special section of the GEO explores such an alternative scenario to Fitch’s baseline case and highlights the fragility of economic growth in the EZ.

Notwithstanding the short and long term decisions taken by the European Council on 9 December to resolve the euro crisis, market tension remains high. Furthermore, progress on US fiscal consolidation or global imbalances could unwind in a disorderly fashion. Therefore, the probability of unfavourable outcomes is high and the risk of tail events, with severe consequences, has increased over the last months. Conversely, improvement in private sector balance sheets could generate stronger demand and a swift resolution of financial stress could boost confidence globally.

For details, see Fitch’s Global Economic Outlook

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