Shifts in currency values and capital flows will widen the gap in global economic performance over the next couple of years, says Moody’s Investors Service in a new report.
The rating agency says that an anticipated tightening in U.S. monetary policy is expected to come at a time when most other central banks are either easing, or maintaining exceptionally loose policy.
“This unusual divergence reflects different prospects for growth and inflation around the world,” it says, as divergent policy tacks will “fuel shifts in capital flows and currency values and affect the global economic outlook.”
A stronger U.S. dollar will dent growth in the U.S., Moody’s says, and this should in turn negatively impact countries such as Canada and Mexico that are major exporters to the U.S.
Moody’s is forecasting U.S. GDP growth of 2.8% in both 2015 and 2016, which is down from the 3.2% estimate in Moody’s last global macro outlook in February, largely because U.S. economic activity in the first quarter was weaker than expected.
“Slightly lower demand from the U.S. will weigh on … export growth [for Canada and Mexico],” Moody’s says, adding, “while lower oil prices are also negative for the two countries.”
Overall, Moody’s expects GDP growth for the G20 of 2.8% in 2015, broadly unchanged from last year; and, that this will rise 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 senior vice president at Moody’s. “The outcome is likely to be increased divergence between those economies that have built up resilience, like the U.S. and India, and those that are vulnerable to negative shocks, like Brazil, South Africa and Turkey.”
A weaker euro and lower oil prices are expected to give a boost to the euro area economy, Moody’s says. It is expecting GDP growth of around 1.5% in both 2015 and 2016. For China, Moody’s is maintaining its forecast that GDP growth will slow to 6.8% in 2015 and 6.5% in 2016, from 7.4% last year.
Moody’s also says that it sees several risks that could lead to lower growth in certain countries, including a Greek exit from the euro area, a disorderly reaction to tighter U.S. monetary policy, and the impact of any future correction of Chinese equity or property prices. On their own, these factors would have only a “limited impact” on the global economy, it says. One source of medium-term risk with potential implications for the global economy is a possible disorderly liberalization of China’s capital account, Moody’s adds.