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Stock Market Vulnerability Expected to Weaken Global Growth

marketFollowing recent volatile stock market reports, the Global Economic Outlook (GEO) from Fitch Ratings forecasts that the global economy will grow by 2.3 percent in 2015, the weakest growth recorded since the global financial crisis in 2009.

Fitch credits "a recession in Brazil and Russia and a structural slowdown in China and many emerging markets (EMs)" for the downward revision in the GEO.

"Although the Fed left its key interest rate unchanged at its September meeting we still expect the Fed to start the global monetary tightening cycle before end-2015, followed by the Bank of England," Fitch said. "The pace and extent of the tightening will be subdued by historical norms. Fitch forecasts the key US policy interest rate to average 0.8 percent in 2016 and 1.6 percent in 2017."

However, the 2016 and 2017 GEO forecast is expected to experience a slight pick-up to 2.7 percent as EMs recover somewhat in the future.

"EMs are becoming an increasing source of global growth risks as the collapse in commodity prices and political shocks exacerbate a secular slowdown," the report noted.

Fitch further explained other factors that contribute to or take away from global growth by acknowledging that "although investment is slowing sharply, growth continues to be supported by robust consumption and policy easing. However, there are downside risks from the real estate sector, capital flows, and policy settings."

Major advanced economies (MAEs) growth is forecast to strengthen to 2 percent in 2016, the fastest since 2011.

The recent performance of the stock market brought about some anxiety among big U.S. businesses and other stakeholders, while the Dow Jones dropped by 1,000 points in August and fought its way back toward the break-even point.

"The real effect—if any—from the stock market volatility of the last few days won’t occur for a while," said Sean Becketti, Chief Economist at Freddie Mac. "It will take time for investors to analyze the depth of the economic weakness in China, the effectiveness of the Chinese government’s responses, and the ultimate impact on various sectors of the U.S. economy.  The interesting near-term impact is on the Fed’s September decision to raise rates or not.  Market sentiment was split roughly even before this event. Today it’s tilting toward no action in September."

One economist was not surprised by Monday's turbulent stock market activity, however.

"I think we've been expecting a correction in the markets for some time now so it's not totally surprising," Trulia Chief Economist Selma Hepp said. "We may expect some of the liquidity seeking refuge in the U.S. commercial real estate and mortgage securities, much less in the residential real estate. On the other hand, however, we will continue to see low mortgage rates as a result of more money going into treasuries."

Click here to view Fitch Ratings' complete report.

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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