Fitch cuts India FY23 GDP growth forecast to 7%; world GDP growth at 2.4%

Global rating agency Fitch has lowered India’s economic growth forecast for fiscal 2022-23 (FY23) as measured by gross domestic product (GDP) to 7 per cent from its June 2022 estimate of 7.8 per cent. It now expects the GDP to slow further to 6.7 per cent in FY24 as compared to its earlier forecast of 7.4 per cent.

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“The (Indian) economy recovered in 2Q22 with growth of 13.5 per cent year-on-year (y-o-y), but this was below our June expectation of an increase of 18.5 per cent y-o-y. Seasonally adjusted estimates show a 3.3 per cent quarter-on-quarter (q-o-q) decline in 2Q22 though this seems to be at odds with high-frequency indicators. We expect the economy to slow given the global economic backdrop, elevated inflation and tighter monetary policy,” Fitch said.

The Reserve Bank of India (RBI), Fitch believes, will continue raising rates to 5.9 per cent before the year-end. The RBI, it said, remains focused on reducing inflation, but said that its decisions would continue to be “calibrated, measured and nimble” and dependent on the unfolding dynamics of inflation and economic activity.

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“We therefore expect policy rates to peak the near future and to remain at 6 per cent throughout next year,” the rating agency noted.

Global growth

At a more macro level, Fitch now expects world GDP to grow by 2.4 per cent in 2022 – revised down by 0.5 percentage points (ppt) since the June assessment – and by just 1.7 per cent in 2023, a cut of 1 ppt. The eurozone and the United Kingdom, Fitech said, are now expected to enter recession later this year and Fitch forecasts that the US will suffer a mild recession in mid-2023.

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The biggest forecast cuts, according to the report, have been to the eurozone in response to the natural gas crisis. US growth has also been revised down to 1.7 per cent in 2022 and 0.5 per cent in 2023, revisions of 1.2pp and 1.0pp respectively.

“The European gas crisis, high inflation and a sharp acceleration in the pace of global monetary policy tightening are taking a heavy toll on economic prospects. Fitch Ratings’ September 2022 Global Economic Outlook (GEO) includes deep and wide cuts to global GDP forecasts,” wrote Brian Coulton and Pawel Borowski of Fitch in their latest assessment of global economy.

In contrast to the role of QE in the pandemic, they said, central bank policies are no longer supportive of fiscal easing to protect households and firms from economic shocks. With liquidity conditions tightening, large-scale fiscal easing could push up long-term real interest rates.

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“Central banks are now much more concerned about inflation becoming entrenched, threatening the medium-term credibility of inflation targets. A de-anchoring of inflation expectations would require more aggressive tightening – with higher output costs – later on. Hence, they are now focused on using their monetary policy tools to bring down inflation, with the near-term impact on activity and jobs a secondary concern,” Fitch said.

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