More NewsPotential Impact of Hypothetical US ‘Double Dip’ on Global Economic Recovery

Potential Impact of Hypothetical US 'Double Dip' on Global Economic Recovery

Fitch Ratings has published a report exploring the simulated effects of a hypothetical ‘double dip’ recession in the US on the global economic recovery, where US growth falls to 1% in 2011, negative 0.6% in 2012, and 1.5% in 2013.

As a result of official data revisions and a raft of weak economic indicators, Fitch recently lowered its forecasts for US growth to 1.8% in 2011 (from 2.6%) and 2.3% in 2012 (from 2.8%).

The report presents a country-by-country analysis of the effects of a hypothetical US slowdown, through mainly focusing on the impact through trade channels. The study does not seek to quantify second-round effects resulting from heightened risk aversion, which would likely have an additional material effect on the global economy.

Under the hypothetical US double dip scenario, world GDP would be a minimum 2.1 percentage points (pp) lower compared with Fitch’s baseline scenario on a cumulative basis for 2011-2013. World GDP growth would be 0.3pp lower than the baseline in 2011, 1.2pp lower in 2012 and 0.7pp lower in 2013. At the same time, a subsequent contraction in global oil demand would lead to a decline in oil prices to around US$90/barrel in 2012 and US$85/barrel in 2013, against Fitch’s baseline projection of USD100/barrel for 2012 and 2013.

“With the emergence of consumer retrenchment in the context of weak labour and housing markets, and a re-intensification of financial market stress related to the euro area crisis, market concerns over the chance of the US tipping back into recession have increased,” said Maria Malas-Mroueh, director in Fitch’s sovereign group.

On a cumulative basis (2011-2013), the euro area, UK and Japan slow by 1.6 pp, 0.7 pp and 0.9 pp against the baseline scenario, respectively, but the full effect on major advanced economies may well be larger due to second-round effects including through inter-dependent financial sectors.

Overall, small and open emerging Asian economies with extensive trade links to the US and China would suffer the steepest declines in output in the ‘double dip’ scenario, while in central and eastern Europe, growth would weaken mainly as a result of slower euro area growth and heightened global risk aversion. Countries in the Middle East and Africa would be adversely affected by the decline in oil and other commodity prices, and Latin American economies would suffer from deteriorating US trade, and lower tourism and remittances.

On a country basis, Mexico and Canada would be severely affected by slower US growth, while in China real GDP growth would slow to the below-potential level of 7% in 2012 and 2013, with repercussions extending to the rest of the world.

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