Previously, Moody's had estimated 2017 and 2018 growth of the US economy at 2.2 per cent and 2.1 per cent, respectively.
The estimated trend pace of growth will be sufficient to absorb remaining slack in the labour market, further pushing up nominal wages and inflation, says Moody's Investors Service in a report. Moody's expects that growth will return to around 1.9 per cent over the medium term.
However, while fiscal policy could support growth in the US, the effect would be offset by tighter monetary conditions as the Federal Reserve continues to raise interest rates.
"It is highly likely that the direction of the world economy over the next two years will be shaped by policy developments in the US," said Elena Duggar, an associate managing director at Moody's. "It is clear that some of the new administrations' proposed policies could have considerable impact on the economic, environmental and geopolitical landscape worldwide."
The impact of shifting US trade policies is already being seen in Mexico with a high likelihood of trade restrictions targeted specifically at Mexico. This will increase risk aversion and dampen sentiment and investment in Mexico by more than Moody's had previously anticipated. After revising growth projections for 2017 and 2018 down in November, Moody's has lowered them again and now expect growth to be even lower at 1.4 per cent in 2017 and 2 per cent in 2018.
For the global economy, Moody's expects expansion this year. The modest momentum of emerging market economies, coupled with developed countries performing close to their potential, will help the global economy expand this year, says the report. However, it adds a word of caution and states that the outlook could still be impacted by significant shifts in US policy on a number of issues, including trade and immigration.
Moody's expects the rate of growth in G-20 countries to pick up to around 3 per cent in 2017 and 2018 from an estimated 2.6 per cent in 2016. Growth in emerging economies will climb to 4.8 per cent this year, and reach 1.9 per cent for advanced economies.
"Global demand is rebounding and much of the adjustment to lower commodity prices is now behind us," said Madhavi Bokil, a vice president and senior analyst at Moody's. "However, structural factors, such as aging populations and high debt levels, combined with a reduced pace of globalisation, put a cap on long-term trend growth." (RKS)
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