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Abu Dhabi, UAEMonday 18 June 2018

Moody's maintains G20 growth forecasts despite geopolitical risk

China, South Korea and Japan growth forecasts raised, US cut

Moody's says that aggression from North Korea - which this week fired a missile over Japan - and rhetoric from US President Donald Trump has heightened the risk of conflict in the Korean Peninsula. Lee Jin-man / AP
Moody's says that aggression from North Korea - which this week fired a missile over Japan - and rhetoric from US President Donald Trump has heightened the risk of conflict in the Korean Peninsula. Lee Jin-man / AP

Moody’s Investors Service kept its forecast for G20 economic growth at just over 3 per cent for this year and next, but warned of geopolitical risks, US protectionism and 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 in the rest of the year as suggested by robust sentiment indicators and revised upwards its forecasts for Germany, France and Italy.

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The agency cut its forecast for the United States, however, to 2.2 per cent in 2017 and 2.3 per cent in 2018 from a previous 2.4 per cent and 2.5 per cent, respectively, citing its 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 Donald Trump administration deemed as unfair trade practices, which could hurt growth if wide-ranging measures were introduced.

For markets, it 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 the economy has become increasingly reliant on new debt to foster growth. The agency downgraded China’s ratings by one notch to A1 in May, saying the financial strength of the economy would erode in 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 coming months.