Developed Economies’ Potential Growth Revised Up to 1.6%

Fitch Ratings - Fitch Ratings has updated its five-year projections for supply-side potential GDP growth for the 10 developed economies (‘DM10’) covered in its Global Economic Outlook. The GDP-weighted average DM10 potential growth projection has been raised to 1.6% a year from 1.4% in the previous report in August 2023.

This reflects more optimistic projections for the US, revised up to 2.1% from 1.7% in the previous report, Spain, raised to 2.0% from 1.4%, and the UK (1.4% from 1.2%). These changes are partially offset by a sharp downward revision to Germany’s potential growth rate to 0.7% from 1.1%.

Other revisions have been fairly small. Projections for Australia and Switzerland have been revised up by 0.1pp to 2.2% and 1.5%, respectively, while projections for France and Canada have been cut by 0.1pp to 1.1% and 1.4%, respectively. Projections for Japan and Italy are unchanged at 0.5% and 0.7%, respectively.

US economic performance in the past five years surpassed earlier expectations by a wide margin. GDP and labour productivity grew 2.4% and 1.7% a year on average over 2020 to 2024, respectively. But supply was also supported by rapid immigration over 2022 to 2024, which boosted the labour force. Immigration is now slowing sharply and Fitch expects potential growth to slow to 2.1%.

Spain’s revision reflects sustained improvements in labour market performance and a rising share of working-age adults in employment. UK potential has recently benefitted from faster immigration. Our UK working-age population projections have been revised up sharply despite policy goals to slow immigration.

Germany’s economy has not grown in the past five years. We expect performance to improve as productivity growth recovers towards its 10-year average and public investment picks up. The projections in this report are slightly higher than our interim update of 0.6% for Germany in May.