OREANDA-NEWS. In its latest Global Economic Outlook (GEO) Fitch Ratings forecasts the global economy will grow by 2.4% in 2015, followed by 2.9% in 2016 and 2.8% in 2017, the new horizon added to the forecast. The pick-up in 2016 reflects a recovery from recession in Brazil and Russia, albeit a weak one; while the structural slowdown in China is weighing on global growth potential. Meanwhile we forecast growth in major advanced economies (MAEs) at 1.8% in 2015, 2% in 2016 and 1.8% in 2017.

Fitch's global growth forecast (which is weighted at market exchange rates) has weakened since March's GEO by 0.3pp for 2015 - due mainly to US revisions - and is practically unchanged for 2016.

The US Fed will start the global monetary tightening cycle with the first rate increase before the end of 2015, followed by the Bank of England. However, the pace and extent of the tightening will be subdued by historical norms. Fitch forecasts the key US policy interest rate to average 1.1% in 2016 and 2.3% in 2017. The ECB and the Bank of Japan will continue their QE programmes. As recent bouts of market volatility highlight communication of major central banks will remain a key determinant of global financial conditions.

Following an unexpectedly weak 1Q15 outturn, Fitch forecasts the US economy will rebound to 2.2% growth in 2015 and 2.5% in 2016-2017, a revision of -0.9pp for 2015 and -0.5pp for 2016 since the March GEO. While improving fundamentals and strong confidence support the recovery, the appreciating US dollar has hurt trade performance and households' propensity to save is constraining consumption growth. The labour market is strengthening with unemployment down to 5.5% and wage growth finally starting to pick up.

Our baseline forecast is for eurozone GDP growth to strengthen from 0.9% in 2014 to around 1.6% in 2015-2017, but the risk of a Greek exit from the eurozone has intensified following the breakdown in talks between Greece and its creditors and the announcement of a referendum on the bailout proposals, to be held on 5 July. This poses a risk to economic recovery. A weaker exchange rate, low oil prices, strengthening confidence, quantitative easing and improved credit conditions support growth. Nevertheless high debt levels and structural weaknesses will constrain the recovery for a prolonged period and the growth potential is weak compared with other MAEs.

The combination of a modest pick-up in headline inflation, strengthening recovery and stabilisation of longer term inflation expectations have led to a moderation of deflation risks, although inflation will likely remain below the ECB's target until 2017 and deflation risks could re-intensify in case of adverse shocks, such as a disorderly Greek exit.

There is a stark divergence in growth prospects across emerging markets (EM), reflecting differing exposures to commodity prices, external financing needs and other global macro trends, as well as country specific factors. Among the BRICs, GDP growth will range from 7.8% in India to a contraction of 3% in Russia and 1.5% in Brazil this year. China is in a gradual structural slowdown and our unchanged growth forecast is 6.8% in 2015, 6.5% in 2016 and 6% in 2017. India's GDP growth will surpass China's this year for the first time since 1999, and accelerate to 8% in 2016 and 8.1% in 2017. Recovery from the recession in Russia and Brazil will be weak, with growth rates of only 1.5% by 2017.

Japan is forecast to return to above-trend growth of 1.2% in 2015 and 1.4% in 2016, supported by currency depreciation and higher real wages after the weakness in 2H14. However, growth will again slow in 2017 based on the assumption of consumption tax increase scheduled for April 2017.

The UK economy is at the peak of its economic growth cycle as spare capacity is gradually absorbed. The GDP growth forecast is 2.5% in 2015, 2.3% in 2016 and 2.1% in 2017. The labour market duality, strong employment growth accompanied by subdued wage dynamics, has continued, while inflation declined to -0.1%, its lowest rate for more than 50 years.

This GEO's alternative scenario presents some illustrative global and regional scenarios of secular stagnation and the spill-over effects through trade and financial channels. Secular stagnation would lead to permanently lower GDP and inflation in all major regions. According to the results, a US shock would have the greatest impact with global growth slowing and current account positions deteriorating in major trading partners. In case of a eurozone shock, Germany would see the largest improvement in its current account position while France and Italy would be less able to mitigate the shock through the external sector.