Moody's: Global economic growth will turn higher and peak in 2018

Global economic growth will hit a high-water mark in 2018

Global economic growth will turn higher and peak in 2018, driven by improvement in advanced economies. Gently rising inflation will prompt tighter monetary policy that will moderate growth rates in 2019. We expect G-20 economies to grow 3.4% in 2018 and 3.2% in 2019, up from our November views of 3.2% and 3.1%, respectively.

Further upside to US growth: We have raised our 2018 US real GDP growth projection to 2.7% from 2.3% in November to incorporate the stronger growth momentum evident at year-end and an additional stimulus from fiscal expansion. In addition to the US, we raised our estimates of 2018 real GDP growth for the following G-20 economies: Japan, Germany, France, the UK, South Korea, Russia, Saudi Arabia, South Africa and Turkey. The euro area is exhibiting the best economic performance since the 2012 debt crisis.

 

Headline and core inflation are set to rise globally but will remain contained: We expect a gradual rise of inflation in the US, euro area and Japan over the next two years. The recent rise in oil prices is likely to feed into inflation rates in a number of emerging market countries this year, although appreciation of their currencies against the US dollar would somewhat offset the rise in oil prices in domestic currencies. In addition, producer price inflation has strengthened in China over the past few months, eliminating a source of downward pressure on inflation in other countries.

The recent financial market volatility does not alter our US and global growth outlook: We view the recent correction in the global stock and bond markets against the backdrop of stronger growth and the inevitable normalization of interest rates in advanced economies. A financial tightening from a modest correction in asset prices will have little impact on the fundamental health of the US or global economy. However, a new concern has emerged: a possible disorderly move in the US government bond market in 2018 as Treasury issuance increases to fund wider deficits. Emerging market countries remain vulnerable to tightening financial conditions in advanced economies.

Risks to global economic outlook stem from US trade policy and financial markets: We believe that the risk of a renewed emphasis on protectionism in the US has increased since last year. Uncertainty surrounding the future of NAFTA will continue to weigh on investment and growth, particularly for Mexico in 2018.

Among the other major emerging market countries, we have left our growth expectations for India and Indonesia unchanged. There are some signs that the Indian economy is starting to recover from the soft growth patch attributed to the negative impact of the demonetization undertaken in 2016 and disruption related to last year's rollout of the Goods and Service Tax. The 2018 budget includes some measures that could stabilize the rural economy that was disproportionately hit by the demonetization policy and is yet to recover. As we have said before, the bank recapitalization plan should also help credit growth over time, thereby supporting growth.

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