Euro Area to Achieve Above-Potential Growth Over Next Two Years as Major Economies Accelerate

The euro area economy will achieve above-potential growth this year and next, led by solid momentum in Germany, Moody's Investors Service says in its Global Macroeconomic Outlook report.

The euro area as a whole is expected to grow around 0.3 percentage points faster in 2017 and 2018 and Moody's has revised up its growth forecasts for Germany, France and Italy.

"Robust survey indicators in euro area countries suggest that growth should accelerate through the rest of the year, while the consumer confidence indicator at a 16-year high bodes well for the consumer-driven recovery," said Madhavi Bokil, a vice president at Moody's and author of the report.

Moody's forecasts euro area GDP growth of 2.1% in 2017 and 1.9% in 2018 after 1.7% in 2016.

Moody's has revised up Germany's GDP growth forecasts to 2.2% and 2.0% for 2017 and 2018 respectively.

Similarly, Moody's has raised its forecasts for France to 1.6% for both 2017 and 2018, from 1.3% and 1.4% as the recovery remains on track, driven by net exports and investment.

In Italy, Moody's expects that the recovery will also continue to benefit from supportive monetary and fiscal policies, as well as stronger growth in the rest of the European Union. Moody's has revised up its real GDP growth forecast to 1.3% in 2017 and 2018 from 0.8% and 1% respectively.

Collective growth of G20 economies

G20 economies will collectively grow at an annual rate of slightly more than 3% in 2017 and 2018, higher than last year's 2.6%.

With considerable slack remaining in some euro area economies and some emerging market countries, the current pace of growth around 2% in advanced economies and more than 5% in emerging markets is not only sustainable in the near term, there is potential for upside.

Moody's expects US growth of 2.2% in 2017 and 2.3% in 2018, down from 2.4% and 2.5%, respectively. The revisions in 2017 are a result of weaker performance in the first half of the year. The lower growth forecast for 2018 reflects expectations of a more modest fiscal stimulus than previously assumed.

Growth projections have also been revised down for Saudi Arabia and South Africa in the EMEA region, and India.

Monetary policy in the US should continue to tighten this year and next. Moody's also expects euro area monetary policy to become less supportive in 2018, provided that the current growth momentum remains intact.

The Bank of Japan's policy stance will likely become less accommodative once the 2% inflation target is reached, which the central bank expects in 2019.

The report also includes an overview of key systemic risks. Geopolitical event risks include potential conflict in the Korean Peninsula, the South China Sea and the Middle East.

"A significant escalation of any of the situations in Korea, the South China Sea and other areas could have significant negative credit implications for the global economy," said Elena Duggar, an associate managing director at Moody's. Other risks include a protectionist turn by the US, and any financial market volatility stemming from sudden changes in market expectation regarding monetary policy tightening.

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