Global growth prospects are improving as fiscal support is stepped up sharply, economies adapt to social distancing and vaccination rollout gathers momentum, says Fitch Ratings in its latest Global Economic Outlook (GEO).

Fitch now expects global GDP to expand by 6.1% this year, revised up from 5.3% in its December 2020 GEO. GDP outturns were stronger than expected in 4Q20 – particularly in Europe and emerging markets (EM) – and world GDP declined by 3.4% in 2020 as a whole, compared to Fitch’s previous forecast of a 3.7% decline. World GDP is now expected to be 2.5% higher in 2021 than in the pre-pandemic year of 2019.

“The pandemic is not over, but it is starting to look like we have entered the final phase of the economic crisis” said Brian Coulton, Chief Economist.

Fitch now forecasts US GDP growth at 6.2% in 2021 (revised up from 4.5%), China at 8.4% (from 8.0%) and the eurozone at 4.7% (unchanged). Growth in EM excluding China is forecast at 6.0% (up from 5.0%).

The main driver of Fitch’s global forecast revision is the much larger-than-expected fiscal stimulus package recently passed in the US. The USD1.9 trillion price tag represents more than 2.5% of global GDP. Fiscal support had a powerful cushioning impact in 2020.

Further fiscal easing has also been announced in the UK, Italy, Japan, Germany and India, while the EU’s Next Generation EU recovery fund (NGEU) should provide a sizeable boost to eurozone growth in 2022. China is the only major economy that is starting to normalise macroeconomic policy settings, where the fiscal deficit is being scaled back and credit growth is slowing as the economic recovery matures.

Fitch notes that unemployment forecasts for the major economies have been cut but job market recoveries continue to lag. Leisure and transport (L&T) industries are labour-intensive and are still afflicted by social distancing. US employment is still 6.1% below pre-pandemic levels (compared to GDP which is 2.4% lower), while L&T accounts for more than one-third of furloughed workers in the EU.

Vaccine rollout has gained momentum, particularly in the UK and US, Fitch adds. “The eurozone has had a slower start but the programme should accelerate in 2Q21. It is still reasonable to assume that the health crisis will ease by mid-year, allowing social contact to start to recover. But immunisation delays or problems remain the key downside risk to the forecast.”

Improving growth prospects, commodity price increases, and short-term supply constraints in some manufacturing sectors have renewed focus on inflation risks. US bond yields are up by 60bp this year.

The rate of headline US inflation could rise above 3% yoy in April but underlying inflation will increase much more gradually given labour market slack, Fitch notes. “The Fed is focused on unemployment, more tolerant of higher inflation and will remain patient. Core inflation will stay well below target in the eurozone and the ECB will continue to purchase assets through 2022.”

South Africa

GDP contracted by 7% in 2020, less severe than Fitch’s forecast of -8.1% in the December GEO. The economy was already on a weak footing before the pandemic as GDP had been declining since 3Q19, reflecting a combination of cyclical and structural factors.

“We expect these ongoing challenges to constrain the recovery and we forecast a mild growth trajectory of 4.3% in 2021 and 2.5% in 2022.”

GDP rebounded by 13.7% qoq in 3Q20 and 1.5% in 4Q20 following a 16.6% slump in 2Q20. The gradual lifting of stringent lockdown measures starting in June and the improvement in the terms-of-trade with the rise in metal prices supported a rebound in mining and manufacturing and a recovery in exports. Retail, accommodation and catering also made strong contributions to the recovery as private consumption rose, despite restrictions on transport, travel and high unemployment.

Still, nearly all sectors of the economy contracted sharply over the full year except for agriculture and government services. Output fell at double-digit rates in mining, manufacturing, construction and transport. The pandemic shock particularly affected fixed investment, which declined by a staggering 17.5%. Consumption decreased by a smaller but still significant 4%. The slump in domestic demand translated into a sharper fall in imports than in exports and an improvement in the current account balance. A string of weak indicators suggests the recovery stumbled upon a return to level-3 social restrictions in 1Q21.

“We forecast growth to gather pace in 2Q21 after the easing of restrictions in early March but significant challenges persist. Household disposable income will come under pressure from the end of fiscal support measures, the rise in energy prices and wage moderation. Electricity outages and fiscal consolidation will further weigh on activity. Real GDP in 4Q20 was 4.2% below its (4Q19) pre-pandemic level and we do not expect it to fully recover until end-2022.”

Inflation has been stable since mid-2020 and was 3.2% in January. Fitch expects it to rise moderately towards the mid-point of the South African Reserve Bank’s 3%-6% target. Fitch believes that a mild recovery and moderate inflation should keep the SARB rate on hold in 2021.