Global Growth on Track for Improvement This Year and Next, though Risks Remain

Forecasts for global economic activity point to growth this year and next, though several risks remain to cloud the picture. According to a new Moody’s Investors Service report, G-20 countries are on track for increased growth of 3% in 2017 and 2018, up from 2.6% last year.

"Specifically, we see four major systemic risks to our forecasts: 1) global economic risks associated with shifts in US trade; 2) risks to global financial markets and emerging market economies if U.S. interest rates were to rise faster than anticipated and/or the U.S. dollar were to appreciate sharply; 3) risks of a sudden and sharp deceleration in China; and 4) political and fragmentation risks in the EU and the euro area," said Madhavi Bokil, a Moody’s vice president and senior analyst.

Trade with countries that the U.S. has large trade deficits with, including China and Mexico, could be impacted by large tariffs, and “…could potentially be inflationary and harmful for near-term growth as they are likely to be met with retaliatory actions,” Bokil said.

In the U.S., an expected bump from stimulating fiscal policy should ramp up growth to 2.4% this year and 2.5% in 2018, up from a prior forecast of 2.2% and 2.1% growth, respectively.

In Asia, India is likely to see the fastest growth rate of any G-20 economy at 7.1% this year, though demonetization of 86% of the nation’s circulating currency in the fourth quarter of 2016 weighed on a previous forecast of 7.5%, Moody’s said.

Growth in China is set to slow to 6.3% this year and 6.0% in 2018 from 6.7% in 2016. “The Chinese economy's solid growth performance last year, in part through significant policy support, has further helped reinforce various positive dynamics, such as firming commodities prices,” Moody’s analysts said.

In European nations’ economies, ongoing growth and resilience could be tested if the European Central Bank tapers, analysts said. In Germany, Moody’s raised its growth forecast to 1.6% this year and next, up from 1.5% and 1.4%, respectively. The nation’s economy has been buoyed by a robust labor market, rising wages and low interest rates; these factors should continue to be in play in the near term. The U.K. is the only G-20 economy Moody’s expects to decelerate this year—to 1% from a 2% estimation in 2016—as the country carries on negotiations for its departure from the European Union.

Emerging markets for the most part should help lift the global economy in 2017 and 2018, though the outlook for specific countries like Mexico remains stormy. Moody’s has continued to revise downward its growth forecast for Mexico to 1.4% this year and 2% in 2018 from 1.9% and 2.3%, respectively, in a November forecast. Trade restrictions from the U.S. could increase risk aversion and lead to reduced investment in the country, Bokil said.

"In summary, global demand is rebounding after weak economic activity in 2016, and much of the adjustment to lower commodity prices is now behind us," said Elena Duggar, a Moody's associate managing director. "However, structural factors, such as aging populations and high debt levels, combined with a reduced pace of globalization, put a cap on long-term trend growth."

– Nicholas Stern, senior editor

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