Advanced Economies Likely to Drive Global Growth as Emerging Markets Slow Down

Advanced economies and emerging markets are assuming unexpected roles, with the former leading the recovery in the global economy while the latter weighs on global growth, at least temporarily, says Moody's Investors Service in a report.

 

In the report entitled "Global Macro Outlook 2014-15: Role Reversal, as Advanced Economies Emerge as Engine of Recovery," Moody's notes that reforms and accommodative monetary policy in the aftermath of the global financial and the euro area crises are slowly bearing fruit in advanced economies.

 

After a soft patch at the start of the year, US economic activity is set to pick up during 2014 on the back of strong corporate balance sheets, favourable financing conditions, a smaller fiscal drag and strong price competitiveness. Moreover, after two years of recession, the euro area will contribute positively to global growth in 2014 as exporters benefit from competitiveness-improving reforms and as constraints on households' budgets ease.

 

By contrast, Moody's says that for some emerging markets a range of factors point to slower growth than in recent years. In China, measures to slow credit growth and wean the economy off its dependence on investment are likely to ensure medium-term sustainability. However, in the short term, they are likely to imply lower GDP growth than in the recent past, probably around 7%, 0.5% below the official 7.5% target.

 

In other emerging markets, some of the risks highlighted in February, including lower capital inflows, have crystallized and growth will be dampened by tighter financing conditions this year.

 

Capital inflows will likely be slower than in recent years as a result of investors adjusting their investment allocations to changes in US monetary policy while domestic monetary policy has already been tightened in response to inflationary pressures.

 

Apart from credibility-enhancing actions by a number of central banks in response to inflation risks, plans for reforms to strengthen emerging markets' economies and reduce their vulnerability to a slowdown in capital inflows are limited to political campaign rhetoric so far. As a result, growth in emerging markets is likely to remain slower for some time.

 

Overall, positive developments in advanced economies will raise global growth this year to around 3%.

 

For emerging markets, growth in 2014 is likely to be lower than in 2013. In 2015, as stronger trade spills over to improved domestic activity in most countries, global growth is expected to rise further, to reach close to 3.5% for the G20 economies, in line with historical averages.

 

The risks to Moody's global outlook have increased somewhat since February.

 

Among the three main sources of risk is a disorderly implementation of measures designed to slow credit growth in China, which would lead to growth there and in the world economy as a whole being significantly weaker than currently envisaged.

 

Another source of risk is an escalation of political tensions with Russia, although only very negative developments that would undermine business confidence in the West and cause companies to postpone investment and recruitment plans on a sustained basis would threaten the global recovery.

 

Finally, a broad-based reassessment by investors of emerging markets' prospects could lead to a sharp, widespread, slowdown in capital inflows and difficulties to access finance in these countries.
 

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