The continued recovery in advanced economies is likely to drive global growth higher over the next couple of years, even as emerging markets slow, but risks to the outlook have risen, too, says Moody’s Investors Service in a new report.
The rating agency says that positive developments in the advanced economies are forecast to raise global growth to around 3% this year. Whereas, emerging market growth is likely to be lower this year than it was in 2013. Looking ahead to 2015, growth is expected to approach 3.5% for the G20 economies, “as stronger trade spills over to improved domestic activity in most countries.”
Moody’s notes that reforms and accommodative monetary policy in the aftermath of the global financial crisis and the subsequent European sovereign debt crisis “are slowly bearing fruit in advanced economies.”
“After a soft patch at the start of the year, U.S. economic activity is set to pick up during 2014 on the back of strong corporate balance sheets, favourable financing conditions, a smaller fiscal drag and strong price competitiveness,” it says. And, after two years of recession, it also expects the euro area will contribute positively to global growth this year, “as exporters benefit from competitiveness-improving reforms and as constraints on households’ budgets ease.”
Conversely, Moody’s says that a range of factors point to slower growth for many emerging markets. Lower capital inflows and tighter financing conditions are expected to crimp emerging market growth. Additionally, it says that plans for reforms to strengthen emerging markets’ economies and reduce their vulnerability to a slowdown in capital inflows have so far been “limited to political campaign rhetoric … As a result, growth in emerging markets is likely to remain slower for some time.”
Indeed, Moody’s notes that the risks to its global outlook have increased somewhat over the past couple of months. The three main sources of risk that it sees are: a disorderly implementation of measures designed to slow credit growth in China; an escalation of political tensions with Russia; and, a broad-based reassessment of emerging markets’ prospects by investors that would lead to “a sharp, widespread, slowdown in capital inflows” and even tougher financing conditions in these countries.