Fitch Ratings has revised upward its five‑year forecast for supply‑side potential GDP growth across ten leading developed economies (DM10). The GDP‑weighted average estimate now stands at 1.6 per cent annually, up from 1.4 per cent in the August 2023 outlook.
Context and Scope of Fitch Upgrades
The DM10 group includes the United States, Spain, the United Kingdom, Germany, Australia, Switzerland, France, Canada, Japan, and Italy. The upgrade reflects mixed but generally more optimistic performance across these economies, with significant movements in a few major economies offsetting slower growth prospects in others.
Key Revisions
- United States: Potential growth raised from 1.7 per cent to 2.1 per cent. Past performance, GDP growth averaging 2.4 per cent and labour productivity 1.7 per cent per year (2020‑2024) has exceeded expectations. This has been underpinned by strong immigration inflows, though Fitch cautions these are now slowing.
- Spain: Raised from 1.4 per cent to 2.0 per cent. The upgrade is credited to labour market improvements and increased participation of working‑age adults in employment.
- United Kingdom: Revised from 1.2 per cent to 1.4 per cent. This reflects faster immigration as working‑age population projections were adjusted upward, despite official policy aiming to limit inflows.
- Germany: Growth outlook reduced sharply, from 1.1 per cent to 0.7 per cent. Fitch notes that productivity has lagged and the economy hasn’t grown in five years; but expects modest recovery with improved productivity and increased public investment.
- Australia and Switzerland: Slight upward revisions, Australia to 2.2 per cent (from 2.1), Switzerland to 1.5 per cent (from 1.4).
- France and Canada: Downgrades of 0.1 percentage point, France to 1.1 per cent (from 1.2), Canada to 1.4 per cent (from 1.5).
- Japan and Italy: No change, steady at 0.5 per cent for Japan, 0.7 per cent for Italy.
Implications for Global Dynamics
The overall lift in potential growth signals a cautious but meaningful rebound in productivity and supply capacity across the developed world, driven by demographic trends, immigration, and structural reforms.
For Sri Lanka, implications are indirect but real:
- Export Markets: Stronger developed economies can drive demand for tradeable goods. US and European growth may boost Sri Lankan exports in textiles, tea, agriculture, and other sectors.
- Capital Flows: Global growth projections can influence risk appetite among international investors. A healthier DM10 outlook may support continued recovery in Sri Lanka’s access to foreign investment and credit.
- Remittances: Many Sri Lankan expatriates work in developed economies. Improved labour markets abroad can translate into stable or rising remittances, a critical inflow for Sri Lanka’s foreign reserves.
- Policy Benchmarking: The dynamics underpinning growth, immigration, labour market reforms, productivity gains offer policy lessons. Sri Lanka might benefit from targeted reforms in skills, automation, infrastructure and openness to skilled migration.
Risks and Constraints
- Global volatility remains. Potential shocks geopolitical instability, supply chain disruptions, inflationary spikes could derail improvements.
- Demography: Gains in the US, UK, Spain are partly demographic. These may not apply to Sri Lanka, which faces different age-profile dynamics.
- Structural gaps: Sri Lanka must close gaps in productivity, governance, regulatory frameworks, infrastructure and human capital to capture the latent benefits of global momentum.
Conclusion
Fitch’s upward revision to 1.6 per cent for DM10 forecast is modest but significant. It reflects stronger supply-side fundamentals in key economies. For Sri Lanka, a stronger global backdrop offers opportunities across trade, investment, remittances but only if domestic reforms enable effective capture of these gains. Clarity and discipline in economic strategy and policy execution remain vital.
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