The credit rating agency, Moody’s Investors Service, gave an upbeat assessment of the G20 economies in its latest outlook report on Tuesday. Moody’s says it expects annual growth in the G20 countries to average at just above 3% in both 2017 and 2018, up from the 2.6% seen in 2016. Higher-than-expected growth in the first half of the year in the Asian powerhouses of China, Japan and South Korea, as well as strengthening momentum in the Eurozone has led Moody’s to raise its growth forecasts.
China’s growth for 2017 has been raised from 6.6% to 6.8% and for 2018 from 6.3% to 6.4%. The Japanese growth forecast has been upped from 1.1% to 1.5% in 2017 and from 0.8% to 1.1% in 2018. South Korea is expected to expand by 2.8% in 2017 and 2.5% in 2018, versus previous forecasts of 2.5% and 2.0% respectively. In the euro area, Moody’s has raised its forecasts for 2017 and 2018 by 0.3 percentage points to 2.1% and 1.9%, respectively.
In contrast, growth forecasts in the US have been revised down from 2.4% and 2.5% to 2.2% and 2.3% in 2017 and 2018 respectively. Moody’s said the downward revision was due to weaker-than-expected growth in the first six months of the year and reduced likelihood of a big fiscal stimulus.
While Moody’s said the "balance of risks is more favourable than at the beginning of the year" and that growth has "potential for upside", it cited several potential risks that could harm growth, one of which is the geopolitical risk relating to North Korea. An escalation of tension in the Korean peninsula could damage the growth prospects of the region and hit confidence in emerging market economies. It could also trigger a more sustained rally in safe havens such as gold and the yen.
Moody’s also saw risks from the US’s more protectionist stance towards trade, while the possibility of the US government defaulting on its debt obligations in the event of a prolonged government shutdown would likely lead to a ratings downgrade, which would unsettle financial markets. Lingering political uncertainty in Washington and receding hopes of a fiscal stimulus have contributed to the dollar’s more than 10% slide against a basket of currencies this year.
Another risk raised by Moody’s is China’s deleveraging efforts to tighten financial regulation, which could have spillover effects onto other countries. Debt concerns are also casting a shadow over Australia and the UK.
Ballooning household debt in Australia could become unsustainable once interest rates start to rise. Australian growth is expected to accelerate to 2.5% in 2017 and 2.7% in 2018, according to Moody’s, and although the aussie has appreciated by 10% since the start of the year, a rally in base metal prices has mitigated the impact of a stronger currency, leaving the door open to an interest rate hike in 2018.
The UK is facing a similar risk, with rising household debt and higher inflation leaving consumers exposed as Brexit-related uncertainty starts to drag on growth. Moody’s recently changed its collateral outlooks on the UK’s structured finance sectors to negative as a result of the weakening consumer backdrop. The pound’s sharp depreciation post the Brexit referendum has pushed up UK inflation, while wage growth has failed to pick up. Although sterling has gained some ground against the dollar this year (up almost 5% year to date), it has fallen by around 9% against the euro.
The Eurozone is not totally immune to downside risks either. While the chances of a negative market reaction to the European Central Bank’s expected decision in the autumn to reduce its asset purchases are very low, there is still room for surprises that could upset investors. But perhaps a bigger challenge to the Eurozone economy than tighter monetary policy is the euro’s rapid rise in the forex markets. The euro has gained almost 14% against the US dollar since the start of the year, breaking above $1.20 this week. Many European exporters are highly sensitive to a stronger currency, particularly in the periphery countries. A sharp appreciation could also hamper the ECB’s efforts to boost inflation, potentially leading to a much more gradual withdrawal of stimulus.