Currency Shifts to Widen Global Economic Differences, says Moody’s

Robust US growth and stabilising financing conditions will help the global economy to grow more strongly next year after muted growth in 2015, with divergence between the major economies likely to widen says Moody’s Investors Service.

In its latest quarterly global macro outlook report the credit ratings agency (CRA) predicts gross domestic product (GDP) growth for the major G20 economies of 2.8% in 2015, broadly unchanged from last year, before rising to around 3% in 2016.

“While prospects of robust growth point to a gradual tightening of monetary policy and higher yields in the US, economic prospects are subdued in many other regions,” says Marie Diron, a Moody’s senior vice president and author of the report.

“The outcome is likely to be increased divergence between those economies that have built up resilience, like the US and India, and those that are vulnerable to negative shocks, like Brazil, South Africa and Turkey.”

The anticipated tightening of US monetary policy comes at a time when most other central banks are easing policy or maintaining their loose stance. This unusual divergence reflects different prospects for growth and inflation around the world.

Moody’s says that this gap will fuel shifts in capital flows and currency values and affect the global economic outlook. Countries such as Turkey and South Africa are more vulnerable to the strong US dollar and the changes in capital flows that it reflects.

The weaker euro and lower oil prices is forecast to give a boost to the euro area economy, with GDP growth of 1.5% in both 2015 and 2016, up from Moody’s previous estimate in the last outlook. Lower oil prices and the weaker euro will boost growth in the short term.

However, there is uncertainty over Greece’s negotiations with its international creditors and its future membership of the euro area. A Greek exit – although it is not the CRA’s baseline scenario – would be very negative for the Greek economy.

Since the debt crisis of 2012, the European Central Bank (ECB) has strengthened its ability to respond to a financial shock, while euro area countries have reduced their trade and financial links with Greece, reducing the potential impact of a ‘Grexit’ on other euro member states.

In the US, the stronger dollar will dent growth. However, high starting levels of price competiveness, strong corporate profits and rising real incomes all still point to robust US economy activity. Moody’s forecasts US GDP growth of 2.8% in both 2015 and 2016.

In China, domestic factors will mainly account for economic developments. The CRA maintains its forecast that GDP growth will slow to 6.8% in 2015 and 6.5% in 2016, from 7.4% last year.

Moody’s sees several risks that could lead to lower growth in certain individual countries. The risks include a Greek exit from the euro area, a disorderly reaction to tighter US monetary policy and the impact of any future correction of Chinese equity or property prices. However, on their own, these would have only a limited impact on the global economy.

One source of medium-term risk with potential implications for the global economy is a possible disorderly liberalisation of China’s capital account.

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