economic growth is expected to continue in 2018, albeit moderate by year-end as
a number of countries approach full employment and credit conditions tighten
amid rising interest rates, Moody's Investors Service says in its quarterly
Global Macroeconomic Outlook May update. However, downside risks have
materialized following recent episodes of financial market stress in emerging
markets, the uptick in oil prices and trade tensions between the US and China,
according to a Moody's Rating report.
Emerging market countries are forecast to grow by 5.2% in both 2018 and 2019, down from 5.3% in 2017. The outlook for the emerging market countries is based on an assessment of each country's overall economic strength and the ability to withstand the rise in the volatility of capital flows.
"Overall, we expect 2018 to be a year of robust global growth, similar to 2017," according to Moody's VP Senior Credit Officer Madhavi Bokil. "The ongoing financial market turbulence in emerging market countries poses risks of a broader negative spillover effect on growth for a range of countries beyond Argentina and Turkey, while there is a risk that high oil prices will weigh on purchasing power and present an upside risk to inflation. A re-escalation of trade tensions between the US and China is another risk factor to growth."
G-20 countries are expected to grow 3.3% in 2018 and 3.2% in 2019. The growth differential between emerging and advanced economies will expand, with the advanced economies growing 2.3% in 2018 and 2.0% in 2019.
In advanced and emerging market economies, further growth acceleration will be limited by rising borrowing costs and tighter credit conditions. In this update the 2018 growth forecasts for Argentina (now at 1.5%), Turkey (2.5%), Canada (2.0%) and India (7.3%) have been reduced, while Moody's has raised the forecast for South Africa (1.6%) and Australia (2.9%).
"The build-up of leverage on corporate balance sheets is of particular concern for the US as well as some emerging market countries. High corporate sector leverage also exacerbates the impact of macroeconomic and financial shocks on the real economy," says Elena Duggar, Moody's Associate managing Director.
The outlook for global monetary policy is broadly unchanged with the US Federal Reserve on a predictable and gradual tightening monetary policy path. Three additional increases in the US federal funds rate this year is expected to be followed by three more hikes in 2019. The European Central Bank will likely stop additional asset purchases by year-end and start increasing the deposit facility rate in the first half of 2019. The Bank of Japan will maintain its current monetary policy over the next two years.
"Rising interest rates and currency depreciation reinforces Moody's view central banks in emerging market countries will not be able to provide monetary policy accommodation for much longer," Bokil says.