Global economic growth is expected to continue at a moderate pace in 2018, although the expansion could be slowed by an uptick in oil prices, trade tensions between U.S. and China, and the recent financial turmoil in emerging markets, according to the latest quarterly outlook from Moody's.
"Overall, we expect 2018 to be a year of robust global growth, similar to 2017," according to Moody's Vice President and Senior Credit Officer Madhavi Bokil, one of the report's authors. "The ongoing financial market turbulence in emerging market countries poses risks of a broader negative spillover effect on growth for a range of countries beyond Argentina and Turkey, while there is a risk that high oil prices will weigh on purchasing power and present an upside risk to inflation."
Growth in emerging market economies is forecast to ease to 5.2% in 2018 and 2019, compared to 5.3% in 2017, Moody's noted. The outlook is based on each country's overall economic strength and the ability to withstand the rise in capital flow volatility.
The G-20 countries, a group that includes the U.S., China, France, Germany, Italy, and Russia and others, are expected to grow by 3.3% in 2018 and 3.2% in 2019. The growth differential between emerging and advanced economies is likely to expand, the rating agency said.
Rising interest rates and tighter credit conditions could hinder the pace of expansion in many markets. Moody's lowered the 2018 growth forecasts for Argentina, Turkey, Canada and India to 1.5%, 2.5%, 2% and 7.3%, respectively, in the report. Concurrently, the rating agency raised the forecast for South Africa and Australia to 1.6% and 2.9%, respectively.
"Rising interest rates and currency depreciation reinforces Moody's view [that] central banks in emerging market countries will not be able to provide monetary policy accommodation for much longer," Bokil said.
"The build-up of leverage on corporate balance sheets is of particular concern for the U.S. as well as some emerging market countries," added Moody's Associate Managing Director Elena Duggar, another author of the report. "High corporate sector leverage also exacerbates the impact of macroeconomic and financial shocks on the real economy."
Moody's outlook for global monetary policy is broadly unchanged as the U.S. Federal Reserve remains on a predictable and gradual policy tightening path.
The rating agency expects three more increases in the U.S. federal funds rate in 2018 and three in 2019. The European Central Bank is likely to stop additional asset purchases by the end of 2018 and start increasing the deposit facility rate in the first half of 2019. The Bank of Japan is expected to maintain its current monetary policy over the next two years, the report said.
