Currency shifts may widen gap between global economies, says Moody's
Divergence between the major economies is likely to widen over the next 12 months driven on by global currency shifts, according to Moody’s.
In a note to clients, the ratings agency suggested that anticipated tightening of US monetary policy was likely to come at a time when most other central banks are easing policy or maintaining their loose stance except the Federal Reserve.
“This unusual divergence reflects different prospects for growth and inflation around the world. The gap will fuel shifts in capital flows and currency values and affect the global economic outlook. Countries such as Turkey and South Africa are more vulnerable to the strong US dollar and the changes in capital flows that it reflects,” Moody’s said.
In the US, a stronger dollar would “dent growth” but high starting levels of price competitiveness, strong corporate profits and rising real incomes all still point to robust US economy activity. Moody's forecasts US GDP growth of 2.8% in both 2015 and 2016, below its initial forecast of 3.2%.
Despite the currency divergence, the agency opined that robust US growth and stabilising financing conditions will help the global economy to grow more strongly next year after muted growth in 2015. Moody's expects G20 GDP growth of 2.8% in 2015, broadly unchanged from last year, before rising to around 3% in 2016.
Marie Diron, senior vice president at Moody’s, said: “While prospects of robust growth point to a gradual tightening of monetary policy and higher yields in the US, economic prospects are subdued in many other regions."
"The outcome is likely to be increased divergence between those economies that have built up resilience, like the US and India, and those that are vulnerable to negative shocks, like Brazil, South Africa and Turkey."
Furthermore, how US growth pans out would have bearing on growth in Canada and Mexico, both of which ship around 75-80% of their exports of goods to the US. Slightly lower demand from the US will weigh on their export growth, while lower oil prices are also negative for both Mexico and Canada.
Elsewhere, Moody’s said a weaker euro and lower oil prices could give a boost to the Eurozone with GDP growth of around 1.5% in both 2015 and 2016, revised up from Moody's previous estimate.