Moody's paints gloomy global growth forecast

In the US, Moody's forecasts GDP growth of 2.3 per cent in 2016 and 2.5 per cent in 2017, broadly unchanged from last year. The recent correction in financial asset prices poses some downside risks to the US forecast if tighter financing conditions weigh more significantly on investment than the current assumption. Moody's anticipates that the US Federal Reserve will continue to raise interest rates gradually, with the Fed funds rate at around 1.75 per cent by the end of 2017.

Lower prices for oil and other commodities have provided a boost to economy activity in the euro area. But these gains are tempered by persistently high debt in some sectors and uncertainty over the success of multiple rounds of quantitative easing. Moody's GDP growth forecast for the region is unchanged at 1.5 per cent in both 2016 and 2017. In Japan, GDP growth is expected to be below 1 per cent both this year and in 2017, despite the boost from lower commodity prices and the weaker yen. The Bank of Japan's 2 per cent inflation target will remain elusive, despite negative policy interest rates.

The main risks to Moody's forecasts include a marked depreciation in China's yuan. For China, the potential gains in price competitiveness would be more than offset by renewed capital outflows in anticipation of a further weakening of the currency. A weaker yuan would also reduce the profits of foreign companies that sell to China, hamper the price competitiveness of other emerging markets and intensify disinflationary pressures in Japan and the euro area.

Other potential risks include heightened geopolitical tensions, particularly in the Middle East, that could lead to volatile financing conditions and increased risk aversion. Moreover, with very large differences in unemployment rates across European countries, cross-border flow of workers helps improve the match between demand and supply of labour and thereby the general functioning of labour markets and the economy. This would be jeopardised by long-lasting restrictions to the movement of people within the European Union., the report said. (SH)

Fibre2Fashion News Desk – India