Global rating agency Fitch has raised India’s medium-term potential growth rate estimate by 70 basis (bps) due to improvement in the employment rate and working-age population while cutting China’s potential growth rate by 70 bps due to a weaker outlook to employment rate and capital deepening.
Fitch Ratings 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% from 1.2%. However, it has 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%. It has also revised the estimate for Poland to 3% from 2.6%, that for Turkiye to 4.1% from 3.9%, that for Brazil to 1.7% from 1.5% and that for Indonesia to 4.9% from 4.7%.
“In India’s case, potential growth has increased by 0.7pp to 6.2% given an improvement in the employment rate and a modest increase in the working-age population forecast. India’s labour productivity forecast is also higher,” Fitch said.
However, the latest estimates remain below Fitch’s pre-pandemic potential growth projections for all the ten emerging market economies except Brazil and Poland. This reflects deteriorating demographic trends and the legacy of disruptions from the pandemic, it said.
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.”
Incorporating both these levels of shocks and changes to our forward-looking potential growth estimates means the projected level of EM10 potential GDP (unweighted average) by 2027 will be around 3.0pp below the path implied by extrapolating forward pre-pandemic estimates of potential growth from 2019. “The cumulative shortfall in the projected level of GDP by 2027 is largest in China at 6.3%, India at 5.8%, South Africa at 5.4% and Mexico at 3.8%,” it said.