Fitch Marks Concern About China and Fiscal Cliff

Fitch is the latest of the ratings firms and global research houses to cut growth forecasts of what have been very resilient economies, particularly China. Fitch has marked the major cause to overall malaise around the world with special attention to the eurozone. But Fitch has specifically emphasized its concern that the U.S. fiscal cliff problem will reverberate around the world, even in emerging economies.

In its September Global Economic Outlook, analysts from the agency state:

Weak recent data and high-frequency indicators highlight the persistent weakness and downside risks facing the global recovery. Notwithstanding forceful monetary policy interventions by the Fed, ECB and BoJ in September, Fitch Ratings forecasts that economic growth in the major advanced economies (MAE) will remain sluggish at 1.0% in 2012, followed by only a modest acceleration to 1.4% in 2013 and 2.0% in 2014. Fitch‟s global growth forecast is 2.1% for 2012, 2.6% in 2013 and 3% in 2014%.

The fact that the slowdown will last through 2014 is shocking and shows how deep the effect of the last recession and political bickering in many large nations have hurt the global economy, and will continue to do so.

Growth of gross domestic product in the People’s Republic will fall well below that benchmark of 10%:

In China, Fitch does not expect an abrupt slowdown and forecasts growth at 7.8% in 2012 and 8.2% in 2013, followed by 7.5% in 2014.

And Fitch’s specific comments about the U.S. economy and its impact on the world:

US Fiscal Cliff Impact: Uncertainty about US fiscal policy is the single biggest near-term threat to the global recovery. As the GEO‟s alternative scenario (not our base case) highlights, the dramatic fiscal tightening of USD600bn (3.8% of GDP) implied by the fiscal cliff would not only tip the US economy into an avoidable recession and lead to a cumulative loss of output close of 3% by 2014, but could also halve the rate of global GDP growth to about 1.3% in 2013.

The ripples of U.S. political problems are extraordinary as Fitch sees them.

American politicians continue to debate whether taxes and budget cuts hurt growth or help it. And, almost no one believes the matter will be settled by early next year. What the contents of the debate rarely include is what a U.S. economic slowdown will do to the rest of the world. Beyond that, what a slowdown means to America as it echoes back to U.S. production, exports and unemployment as the effects of a the slowdown return here next year and the one after.

Douglas A. McIntyre