India’s growth to moderate in third quarter: Fitch report

India’s growth to moderate in third quarter: Fitch report

Fitch has forecast a lower consumer spending growth forecast of 5.1 per cent this year as against 7.5 per cent last year.

Fitch Ratings on Thursday said the pace of India’s growth in the third quarter of 2023-24 is likely to moderate as exports continue to weaken, credit growth flatlines and the Reserve Bank of India’s (RBI) latest bimonthly consumer confidence survey shows consumers becoming a little more pessimistic on income and employment prospects.

“Temporary increases in inflation, in particular rising food inflation, in coming months could curb households’ discretionary spending power,” Fitch said in its September Global Economic Outlook (GEO).

“Our expectation is that retail inflation now ends 2023 at 5.5 per cent, higher than our previous forecast of 5 per cent. The inflation impact on consumers may be temporary but other more fundamental factors are weighing on the economy,” it said.

“India will not be immune to the global economic slowdown and the domestic economy will be affected by the lagged impact of the RBI’s 250 bps of hikes in the past year, while a poor monsoon season could complicate the RBI’s control of inflation,” it said.

Fitch has forecast a lower consumer spending growth forecast of 5.1 per cent this year as against 7.5 per cent last year.

It has kept the growth forecasts unchanged (6.3 per cent) from June’s GEO. The RBI projected a retail inflation of 5.4 per cent a growth rate of 6.5 per cent for 2023-24 in the August monetary policy review.

Meanwhile, Fitch has lowered the 2024 world growth forecast by 0.2 percentage point (PP) to 1.9 per cent amid widespread downward revisions and escalating risks from China.

In its September Global Economic Outlook (GEO) report, the agency cut the US growth forecast by 0.2 pp to 0.3 per cent, the eurozone by 0.3 pp to 1.1 per cent, and both China and emerging markets (excluding China) by 0.2 pp to 4.6 per cent and 3.0 per cent, respectively.

The previously hoped-for stabilisation in China’s housing market has failed to materialise and new sales could fall by a fifth this year, Fitch said. Housing is a third of investment and 12 per cent of Chinese GDP and has strong multiplier impacts on the wider economy. Policy easing has been underwhelming to date and export demand is falling, it said in a report.

Rapid US consumption growth has continued this year, despite Federal Reserve tightening, helped by a USD 1.2 trillion drawdown of Covid-19 pandemic savings buffers and robust nominal household income growth – as employment and wages have risen quickly. But labour demand has slowed in recent months and wage inflation will ease further as the labour market continues to cool, according to Fitch.

In addition to the prospect of slowing labour income, the tightening in credit conditions is becoming clearer, with the US credit impulse turning negative. “A downturn in profit growth is also signalling weakening business investment prospects. We still expect a mild US recession, though now anticipate this to occur in the first half of 2024,” Fitch said.

Fitch said the eurozone recovery has stalled in the wake of the energy shock and now faces new external challenges from the slowdown in world trade and China. “We now expect Germany’s economy to contract by 0.4 per cent this year. ECB policy tightening is weighing on credit growth,” it said.

Better news on disinflation means the Fed is now close to reaching a peak on rates and it expects just one more 25 pp hike to 5.75 per cent, Fitch said. “But core inflation is still high – particularly in services – and we have pushed back the date of the first Fed rate cut to May 2024,” it said.

The ECB is also challenged by stubbornly high core inflation and will not be deterred from a further rise in rates by a weakening economic outlook. “The Bank of England is now expected to keep rates higher for longer, as wage inflation stays high despite weak growth. We now expect UK growth to expand by 0.2 per cent in annual terms in 2023 but we still forecast a mild recession in 2H23 as a higher interest burden squeezes household spending,” Fitch said.

The world economy is likely to grow a bit faster in 2023 than Fitch Ratings expected in its June Global Economic Outlook (GEO), but the deepening slump in China’s property market is casting a shadow over global growth prospects, just as monetary tightening increasingly weighs on the demand outlook in the US and Europe, Fitch said.

Fitch has revised up its forecast for world growth in 2023 by 0.1 pp to 2.5 per cent, reflecting surprising resilience so far this year in the US, Japan and emerging markets (EM) excluding China. “We have raised US growth by 0.8 pp to 2.0 per cent, Japan by 0.7 pp to 2.0 per cent and EM (excluding China) by 0.5 pp to 3.4 per cent. This has more than offset a 0.8 pp cut to China – to 4.8 per cent – and a 0.2 pp cut to the eurozone, to 0.6 per cent.

The differential between growth in EM (excluding China and developed economies) is expected to rise towards historical norms this year partly reflecting the earlier timing of the monetary policy tightening cycle in emerging markets, it said.

 

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