Fitch Ratings has raised India’s medium-term potential growth estimate by 70 basis points to 6.2% even as it blamed China for reducing the estimate for 10 emerging markets to 4% on a GDP weighted-average basis.
“We have made large upgrades to India and Mexico, with the latter benefitting from a much better outlook for the capital to labour ratio. India’s estimate is higher at 6.2% from 5.5% and Mexico’s at 2.0% from 1.4%,” the global ratings agency said in a report.
A common factor for the higher growth forecast has been the swift recovery in labour force participation rates following sharp declines in 2020, Fitch said.
However, Fitch has cut the estimate for China to 4.6% from 5.3%, for Russia to 0.8% from 1.6%, for Korea to 2.1% from 2.3% and for South Africa to 1.0% from 1.2%.
The downward revision for China in comparison to the July 2021 assessment is a result of weaker outlook for the employment rate and a reduced expectation for capital deepening in the coming five years, owing to significant reductions in investment growth forecasts. This decrease in capital deepening has resulted in lower projections for labor productivity growth, Fitch said.
Fitch said it predicts average GDP weighted potential growth for the EM10 at 4.0% compared to 4.3% before, owing to China’s lower potential growth forecast and its weight of 57% in EM10 GDP.
If China is taken out of the equation, then a GDP-weighted average EM9 potential growth forecast will be 3.2%, above previous estimate of 3.0%.
As for India, the higher growth estimate comes on the back of an improvement in the employment rate and a modest increase in the working-age population forecast. India’s labour productivity forecast is also higher, it said.
However, Fitch said the latest estimates remain below their pre-pandemic potential growth projections for all the EM10 except Brazil and Poland.
“This reflects deteriorating demographic trends and the legacy of disruptions from the pandemic. The latter are partly reflected through revisions to projections for capital stock and productivity growth. But some “scarring” effects are hard to capture and we have now made additional downward “level shock” adjustments to historical estimates of potential GDP in 2020 and 2021 for Mexico, Indonesia, India and South Africa,” Fitch added.
Incorporating these structural shocks and adjustments to future growth projections results in the estimated potential GDP for the EM10 nations by 2027 being 3.0 percentage points below the trajectory implied by extending pre-pandemic potential growth estimates from 2019.
