Looser austerity likely to help economic recovery, says Fitch

20 Jun 17

A shift away from strict austerity could help power strong growth across 20 of the world’s key economies, according to Fitch.

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Europe currencies. iStock 508035222

Fitch said looser spending policies in advanced economies were a factor in improving growth.

 

In its most recent global economic outlook, published today, Fitch predicted growth across major advanced and emerging markets would come in at 2.9% this year and 3.1% in the next.

If correct, the 2018 figure would mark the highest growth recorded across the ‘Fitch20’ economies since 2010, when it stood at 4.1% after a deep recession the year before.  

The ratings agency said a key factor in the rise in advanced economies was a slow shift away from strict austerity in the US and the eurozone towards looser spending policies, which started last year.

“Fitch’s analysis of multipliers suggests this shift has had a substantial impact on growth dynamics in the advanced economies and seems likely to provide a further growth boost over the next couple of years,” a statement said.

But there had been a “synchronised improvement” across both the advanced and emerging markets in Fitch’s group.

Demand in emerging markets is recovering strongly this year, the agency said, with both Brazil and Russia seeing a return to positive growth after long and crippling recessions.

“Macro policies and tightening labour markets are supporting demand growth in advanced countries, while the turnaround in China’s housing market since 2015 and the recovery in commodity prices from early 2016 has fuelled a rebound in emerging market demand,” continued Brian Coulton, Fitch’s chief economist.

The biggest forecast change is seen in the eurozone where the economic recovery is finally strengthening after years of lacklustre growth.

However, Fitch noted, this also signals the end of extraordinary monetary policies, which have been key in bolstering growth both here and elsewhere.

The eurozone, the UK and the US, for instance, have all employed quantitative easing programmes  and set ultra-low interest rates to stimulate demand.

“With the [US Federal Reserve] now signalling that QE will start to be unwound later this year, these monetary policy adjustments could spark some volatility in global financial markets attuned to persistent monetary accommodation,” said Coulton.

Other risks, including the threat of eurozone fragmentation and aggressive US-led protectionism, are receding, although “have not gone away”, he noted. 

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