Fitch downgrades GDP forecasts amid supply woes

The global economic recovery is facing speed bumps that are leading to lower GDP forecasts, with Canada’s fortunes taking a particular hit in Fitch Ratings’ latest economic outlook report.

Amid supply-chain disruptions that are hampering economic growth and driving higher inflation, the rating agency has trimmed its global GDP forecast for 2021 from 6.3% to 6%.

At the same time, Fitch cut its forecast for the U.S. economy from 6.8% to 6.2%, and it slashed its Canadian GDP call from 6.6% to 5%.

The much weaker forecast for Canada follows an unexpected second-quarter contraction that was prompted by “a plunge in exports, falling residential investment and weak consumption.”

Fitch said this weakness likely bled into the third quarter too, as global supply shortages weighed on the manufacturing sector in particular.

These supply disruptions are running up against strong consumer demand, supported by improving labour markets, along with expansionary fiscal and monetary policy — resulting in robust inflation.

“Supply bottlenecks are curbing the rate of output expansion and creating near-term inflationary pressures,” Fitch said.

The Bank of Canada still expects the recent surge of inflation to prove temporary, “supported by subdued wage inflation measures and stable inflation expectations,” Fitch said.

“The bank will also welcome signs of cooling in the housing market, though demand-supply conditions should maintain support for prices in the near term.”

As a result, Fitch said it expects the central bank will continue tapering asset purchases, before eventually raising interest rates by 25 basis points to 0.5% in late 2022.

Looking ahead to 2022, Fitch has revised its forecast for Canada up slightly to 3.7% from 3.5%, which it sees easing to 2.5% growth in 2023.

Globally, the rating agency said it expects supply constraints and inflation pressures to ease in 2022.

“But price pressures are shifting the tone of the policy debate,” said Brian Coulton, chief economist at Fitch, in a release.

“Fiscal and monetary policy support for growth will start to wane next year,” he concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.