Moody’s: Currency shifts to widen gap between global economies in 2015-16

London (Capital Markets in Africa):- Robust US growth and stabilising financing conditions will help the global economy to grow more strongly next year after muted growth in 2015, says Moody’s Investors Service in its quarterly Global Macro Outlook report. Divergence between the major economies is likely to widen.

The report “Global Macro Outlook: 2015-16. Stronger US Dollar and Shifts in Capital Flows Stoke Divisions in Global Growth”, is now available on Moody’s subscribers can access this report via the link at the end of this press release.

Moody’s expects G20 GDP growth 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.

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.

In the United States, the stronger US 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.

The latest 2015 US forecast is lower than the 3.2% estimate in Moody’s last Global Macro Outlook in February because US economic activity in the first quarter was weaker than previously expected, in part due to temporary factors such as bad weather and strikes in West Coast ports.

Weaker than expected US growth will have a negative impact on growth in Canada and Mexico, both of which ship around 75-80% of their exports of goods to the US. Slightly lower demand from the US will weigh on their export growth, while lower oil prices are also negative for the two countries.

The weaker euro and lower oil prices is forecast to give a boost to the euro area economy, with GDP growth of around 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.

In China, domestic factors will mainly account for economic developments. Moody’s 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.

Moody’s Global Macro Outlook underpins the credit rating agency’s range of ratings, providing a consistent benchmark for analysts and investors.

Subscribers can access this report via this link:

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