Fitch Ratings Cuts China, India 2012 Growth Forecasts

Fitch Ratings on Friday lowered its 2012 growth forecasts for China and India, two of Asia’s biggest economies, citing a deteriorating outlook for the global economy.

Global Markets
Global Markets

In its September Global Economic Outlook, the ratings agency said it now expected China’s economy, the world’s second largest, to grow 7.8 percent this year, down from a forecast of 8 percent made in June.

It also lowered its forecast for economic growth in India to 6 percent in the financial year ending in March 2013 from a previous estimate of 6.5 percent.

China’s recent economic numbershave been soft – exports rose a weaker-than-expected 2.7 percent in August from a year earlier, while industrial output grew at its slowest annual pace in more than three years in the same month, rising 8.9 percent.

The weak numbers have raised concerns about the outlook for China’s economy, but Fitch said it did not think China was facing a sharp slowdown.

“The slowdown in China’s economy to 7.6 percent in (the second quarter of 2012) from 9.3 percent in 2011 has refocused attention on the possibility of a hard landing – a non-technical expression for a much sharper growth slowdown,” the report by Fitch said.

“Fitch does not expect such an outcome. Rather the most likely triggers for such a scenario would come from a much deeper downturn in either the labor or property market than currently expected,” it added.

According to Fitch, the slowdown in China’s economy is much less abrupt than what was seen in 2009 and is partly the result of tighter monetary policy in 2010-2011.

The ratings agency added that China did have the scope to ease monetary policy and such action would act as a buffer against a sharp slowdown.

“Further easing could offset any further negative shocks that might otherwise bring the economy down with a bump,” Fitch said.

China has cut interest rates twice this year, in June and July. It has also eased monetary policy by lowering banks’ reserve requirement ratios three times since November last year.

Challenging Environment for India

Fitch described the outlook for India’s economy as “challenging,” saying that recent indicators suggested economic activity remained weak in the third quarter of the year.

Another concern for Fitch was inflation, which it said remains high despite softening growth and suggests the India’s central bank will not be able to cut interest rates aggressively in the months ahead.

India’s wholesale price index, its key measure of inflation, rose a higher-than-expected 7.55 percent in August from a year earlier, data earlier this month showed. This is well above the Reserve Bank of India’s medium-term target for inflation of 4-6 percent.

A hike in diesel pricesthis month meanwhile is expected to put upward pressure on prices, putting India’s central bank in a tricky position.

“Inflation pressures are likely to intensify following the government’s long-awaited decision to hike diesel prices by 12 percent in mid-September,” Fitch said. “From a monetary perspective, elevated inflationary pressures suggest that the Reserve Bank of India may not be able to aggressively cut policy rates in the near term.”

At a meeting last week, India’s central bank left its benchmark policy rate steady at 8 percent.

- By CNBC's Dhara Ranasinghe