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Fitch: Global economic growth is picking up, but inflation risks are rising

The global economy is set to grow at levels not seen in almost two decades, though abrupt adjustments in interest rates and a major escalation in global trade protectionism pose risks to expansion, Fitch Ratings said in a report.

Global economic growth should remain above 3% until 2019 and the U.S., eurozone and Chinese economies are expected to grow well above trend in 2018, the rating agency projected.

"The acceleration in private investment, pro-cyclical US fiscal easing and global monetary policies that are still very loose are all boosting growth in the advanced economies, while high commodity prices and the weakening of the dollar have underpinned the emerging market recovery," said Brian Coulton, chief economist at Fitch.

The investment cycle is strengthening in advanced economies amid improved business sentiment, rising external demand and increasingly scarce labor resources. The rating agency raised its investment forecasts for the U.S. and eurozone, saying the investment outlook is also supported by reduced economic and policy uncertainty, higher capacity utilization rates, U.S. tax cuts and an increase in eurozone bank lending.

A sharp rise in inflation is unlikely even as strong growth and decreasing unemployment have increased inflation risks, Fitch said. Improved productivity due to rising investment and labor market slack could slow the growth of unit labor costs, it said.

"Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity," Coulton said. Fitch expects the U.S. Federal Reserve to raise interest rates at least seven times before the end of 2019, and the European Central Bank to end its quantitative easing program later this year. The Bank of England is expected to raise interest rates by 25 basis points in 2018.

Fitch raised its U.S. growth forecast for 2018 to 2.7% from 2.5% and for 2019 to 2.5% from 2.2%. The growth forecast for the eurozone was revised up to 2.5% in 2018 from 2.2% and to 1.8% in 2019 from 1.7%.

The rating agency raised its growth forecast for China by 0.1 percentage point, but said the country's economic growth is expected to slow to 6.5% in 2018 from 6.9% in 2017 due to decelerating credit growth and a slowdown in investment.

Fitch said a sharp rise in U.S. core inflation could result in abrupt interest rates adjustments that would be negative for growth. It said a significant increase in global trade tensions is also a key risk to its growth forecasts.

"US-China trade tensions seem highly likely to increase in coming months but the situation would have to deteriorate quite dramatically to adversely affect the near-term global growth outlook," Fitch said.