Global growth potential tumbles as jobless spikes, Fitch says

Bloomberg reports that Global potential economic growth is set to drop in coming years due to fallout from the Covid-19 pandemic, amid a rise in unemployment and a cooling of investment by companies, according to Fitch Ratings Ltd.

The ten advanced countries -- covered in its Global Economic Outlook -- showed an average decline in annual potential gross domestic product growth of about 0.6 percentage point compared with Fitch’s previous five-year outlook. U.S. productive potential growth is revised down to 1.4% from 1.9%, the U.K. to 0.9% from 1.6% and the euro zone -- the weighted average of Germany, France, Italy and Spain -- to 0.7% from 1.2%, it said.

“There will be lasting damage to supply-side productive potential from the coronavirus shock as long-term unemployment rises, working hours fall and investment and capital accumulation slow,” Maxime Darmet, a director in Fitch’s economics team, said in a statement.

The world economy entered the second half of 2020 still deeply weighed down by the pandemic. The coronavirus recession is expected to still see GDP levels in the largest advanced economies remain around 3% to 4% below their pre-virus trend path by the middle of this decade, Fitch said.

A weaker outlook for capital accumulation accounts for about half of the revision to potential growth, the ratings agency said. The remainder is explained by the anticipated reduction in labor as unemployment rises and average hours worked fall, according to Fitch.

Cuts to estimated potential GDP imply “catch-up” growth over the next five years will be far more subdued. Fitch projects U.S. growth to average just over 2% from 2023 to 2025, compared with more than 3% if no adjustments were made to estimated potential growth.

The credit ratings agency acknowledged that risks around its projections are “very large.” These include the path of the health crisis, as well as the potential for fiscal consolidation following the stimulus. Conversely, job-subsidy programs in Europe might prove effective in limiting the rise in unemployment on the continent in the next six to 12 months.