Moody's: Currency shifts to widen gap between global economies in 2015-16

India forecast to have strongest GDP growth in G20; Chinese growth to slow gradually

Robust US growth and stabilising financing conditions will help the global economy to grow more strongly next year after muted growth in 2015, says Moody's Investors Service in its quarterly Global Macro Outlook report. Divergence between the major economies is likely to widen.

Moody's expects G20 GDP growth of 2.8% in 2015, broadly unchanged from last year, before rising to around 3% in 2016.

"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," says Marie Diron, a Moody's Senior Vice President and author of the report. "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."

The anticipated tightening of US monetary policy comes at a time when most other central banks are easing policy or maintaining a loose stance. This unusual divergence reflects different prospects for growth and inflation around the world.

This 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.

India is forecast to be the strongest performer among the G20 countries, with GDP growth of 7.5% in both 2015 and 2016. Cheaper oil and reforms designed to enhance growth are expected to support robust economic activity.

In China, domestic factors will mainly account for economic developments. Moody's maintains its forecast that GDP growth will slow to 6.8% in 2015 and 6.5% in 2016, from 7.4% last year. In Japan, Moody's forecasts growth of 0.5% this year and of 1% in 2016. The weaker yen is only slowly boosting exports with no noticeable effects on domestic demand yet.

In the United States, the stronger US dollar will dent growth. However, high starting levels of price competiveness, 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.

The weaker euro and lower oil prices is forecast to give a boost to the euro area economy, with GDP growth of 1.5% in both 2015 and 2016, up from Moody's previous estimate of around 1% in the last outlook.

Moody's sees several risks that could lead to lower growth in certain individual countries. The risks include a Greek exit from the euro area, a disorderly reaction to tighter US monetary policy and the impact of any future correction of Chinese equity or property prices. However, on their own, these would have only a limited impact on the global economy. One source of medium-term risk with potential implications for the global economy is a possible disorderly liberalisation of China's capital account.

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