Moody's keeps G-20's growth forecast at 3%

HONG KONG • Moody's Investors Service kept its growth forecast for Group of 20 (G-20) economies at just over 3 per cent for this year and next, but warned of geopolitical risks, US protectionism, spillovers from global monetary tightening and China's deleveraging measures.

The ratings agency said surprisingly strong data in the first half of the year prompted it to raise 2017 growth forecasts for China to 6.8 per cent from 6.6 per cent, for South Korea to 2.8 per cent from 2.5 per cent, and for Japan to 1.5 per cent from 1.1 per cent.

It also expected the euro zone to accelerate for the rest of the year as suggested by robust sentiment indicators and revised upwards its forecasts for Germany, France and Italy.

The agency cut its forecast for the United States, however, to 2.2 per cent this year and 2.3 per cent next year, from a previous 2.4 per cent and 2.5 per cent respectively, citing weaker-than-expected first-half performance and expectations of more modest fiscal stimulus than previously assumed.

"The balance of risks is more favourable than it was at the beginning of the year," Moody's said.

"However, we note event risks related to conflicts in the Korean peninsula, the South China Sea and the Middle East.

"The test-firing of missiles by North Korea, intensification of aggressive rhetoric on both sides, and a hardline stance from the Trump administration have raised the risk of a conflict in the Korean peninsula."

The agency also said there appeared to be "renewed momentum" to address bilateral trade issues that the Trump administration had deemed as unfair trade practices, which could hurt growth if wide-ranging measures were introduced.

For markets, Moody's warned of risks of increased volatility due to historically elevated asset prices and broad investor expectations that interest rates would remain low even as the Federal Reserve and the European Central Bank said they were preparing to start rolling back unconventional stimulus.

While raising its China forecasts, the agency warned that the economy has become increasingly reliant on new debt to foster growth. It downgraded China's ratings by one notch to A1 in May, saying that the financial strength of the economy would erode in the coming years.

The agency revised its India forecast slightly lower to 7.1 per cent as the government's demonetisation move last year led to several months of acute shortages for manufacturing and construction firms in particular, although it said it expected the impact to ease in the coming months.

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 31, 2017, with the headline 'Moody's keeps G-20's growth forecast at 3%'. Print Edition | Subscribe