OREANDA-NEWS. Emerging market weaknesses are depressing world growth but look unlikely to spark a global recession, says Fitch Ratings in its latest Global Economic Outlook (GEO). Fitch forecasts the global economy will grow by 2.6% in 2016 and 2.7% in 2017, a modest pick-up after the weakest growth (2.3%) since the global financial crisis in 2015. While the global growth concerns of the late summer have not gone away, emerging-market problems do not appear to be causing extreme damage to activity in the major advanced economies. China looks most likely to muddle through rather than land hard and world trade indicators have improved marginally. Policy stimulus has been stepped up in the eurozone and China and global consumer spending growth is holding up.

Fitch's global growth forecasts are broadly unchanged since September's GEO, with the exception of Brazil. GDP in Brazil is now expected to fall by 3.7% in 2015 (compared with -3% in the last GEO) and a further 2.5% in 2016 (compared with -1%) amid sharp declines in investment and consumption, a deteriorating labour market and very limited policy space.

Private consumption is holding up in the largest economies. It has been growing at its fastest rate since before the global financial crisis in the US and Europeand consumer spending indicators have been quite robust in China and Japan. Low oil prices have sparked sharp, front-loaded falls in oil sector investment worldwide but the benefits of lower oil on consumers' discretionary real income growth are also becoming clearer. Improving labour markets in the advanced countries are also helping job security - with one or two signs of stronger wage inflation emerging in the US - and consumer lending growth has picked up.

The Fed is likely to proceed cautiously after its first hike predicted later this month. We expect the Fed to hike four times before the end of 2016. The ECB and the PBOC are, by contrast, ramping up stimulus efforts and the BOJ could follow suit soon, adding to the ongoing divergence in global monetary policy. The ECB decided at its 3 December meeting to cut the deposit rate by 10bps further into negative territory and to extend its QE programme by two quarters to at least March 2017. China is caught up in the cross-currents of central bank divergence among the advanced economies and a re-emergence of concerns about a sharper depreciation of the CNY cannot be ruled out.

The worst fears of a very sharp near term deceleration in Chinese GDP growth after the financial market volatility of the summer have not been borne out by subsequent indicators. In addition to robust consumer and service sectors, infrastructure investment has remained fairly strong, supported by policy easing. This is tempering the decline in investment growth driven by the real estate and manufacturing sectors. Nevertheless, Fitch expects China's growth to weaken further in 4Q15 and 2016.

The forecasts show a slight pick-up in EM growth in 2016 but this is unlikely to feel anything like a real recovery. Rather it mainly reflects a stabilisation in Russia, where a huge compression in consumption and imports is boosting net trade, Meanwhile activity in Brazil is sinking further into the doldrums Fitch's latest forecasts imply a cumulative 6.2% fall in GDP over 2015 and 2016. India is alone among the BRICs in sustaining previous growth norms.

Underlying inflation is low globally, and longer term inflation expectations are near their historical lows. This GEO's alternative scenario explores the impact of a domestically driven decline in inflation in the eurozone as price expectations fall further below the ECB's target of below but close to 2%. Simulations show that GDP in the eurozone could be 0.3-0.6 pp below the baseline in 2017. Absent a further sharp weakening in the euro, additional ECB quantitative easing in such a scenario might have limited impacts in counterbalancing such a shock.