Fitch Revises Down Global Economic Forecasts Due to Higher Oil Prices; Recovery Still On Track

April 08, 2011: Despite the global economic recovery proceeding on track, Fitch Ratings has revised down its global growth forecasts in its latest quarterly Global Economic Outlook (GEO) publication. This is mainly a reflection of rising oil prices resulting from unrest in the Middle East, as well as the impact of the Tohoku earthquake and tsunami on the Japanese economy. The agency has also increased its inflation estimates globally, and expects an earlier policy response by monetary authorities than previously forecast.

"The increase in oil prices following the escalation of political tensions in the Middle East represents a significant headwind to the global economic recovery. As a result, Fitch now expects world growth to moderate to 3.2% in 2011 and 2012 having reached 3.8% in 2010," says Maria Malas-Mroueh, Director in Fitch's Sovereign team. ''At the same time, inflationary pressures have increased in both advanced economies and emerging markets, exacerbating the policy dilemma faced by many monetary policy authorities," adds Malas-Mroueh.

In the US, the economic recovery is on track, aided by accommodative fiscal and monetary policy measures. However, rising oil prices have led to a downward revision of Fitch's 2011 and 2012 GDP growth forecasts, to 3% in 2011, and 2.8% in 2012, from 3.2% and 3.3%, respectively. In Europe, the agency has revised down its growth forecasts across both core and peripheral economies, partly reflecting the persistent drag from fiscal consolidation, as well as lower consumption and tighter monetary policy in the context of higher oil prices.

For Japan, although it is too early to assess the full economic and fiscal impact of the earthquake and tsunami, Fitch has preliminarily revised down its forecast for 2011 growth to 1% from 1.5%, and revised up its forecast for 2012 growth to 2.2% from 1.7%, primarily reflecting the impact of reconstruction expenditure. Fitch expects GDP losses from short-term disruption of production to be temporary and made up from inventories and relocation of production to less affected areas.

Fitch has also marginally revised down its 2011 and 2012 GDP forecasts for Brazil, China, and India, as policy tightening to control inflation is expected to continue. In contrast, the increase in oil prices has led to a small upward revision of Russia's GDP forecasts in each of 2011 and 2012.

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