Global Growth to Maintain Impetus

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 Moody's Investors Service in a report. Nonetheless, 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% in 2017 and 2018 from an estimated 2.6% in 2016. Growth in emerging economies will climb to 4.8% this year, and reach 1.9% for advanced economies, Moody's reported.     

“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 globalization, put a cap on long-term trend growth.”

In January, Moody’s raised its forecast for US growth to incorporate a mix of potential cuts to federal income and corporate tax rates, as well as an increase in public infrastructure spending. Moody’s now expects the US economy to expand by 2.4% in 2017 and 2.5% in 2018, compared with its previous estimate of 2.2% and 2.1%, respectively. 

This above trend pace of growth will be sufficient to absorb the remaining slack in the labor market, further pushing up nominal wages and inflation. Moody’s expects that growth will return to around 1.9% 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.

Moody’s forecast assumes the US Federal Reserve will raise the federal funds rate by 75-100 basis points in three to four rate hikes in 2017. “We expect the Fed to err on the side of caution and tolerate somewhat above-target inflation in the near term.”

 China and India

Regarding Asia, Moody’s said China’s economy stabilized around the official growth target of 6.7% in 2016, but will likely continue to decelerate to 6.3% and 6% in 2017 and 2018. Also there could be risks of a sudden and sharp deceleration in China, Moody’s said.

India will be the fastest growing economy among G-20 countries clocking a 7.1% growth in 2017, Moody’s Investors Service said.

The Indian economy had slowed in the fourth quarter of 2016 due to the withdrawal of 86% of the currency in circulation—without an immediate replacement.

Pakistani banks, with stable deposit-based funding structure, are poised to benefit during the current and next year from a spurt in loan growth fuelled by the economic stimulus measures of the present government and China-funded infrastructure projects, Moody’s said.

Moody’s expects Pakistan’s real GDP to expand by 4.9% and 5% in the fiscal years ending June 2017 and 2018.