Mixed growth outlook for Asia, as Chinese economy slows, whilst India is set to grow strongly
"Most factors that have weighed on global GDP growth in 2014 will remain in place in the next two years, including the gradual slowdown in China," says Marie Diron, a Moody's Senior Vice President and author of the report. The latter has led to a very sharp deceleration in its imports and has dampened export growth globally. "Moreover, structural deficiencies in some countries and regions - including the euro area, Brazil and South Africa - are also preventing a significant rebound in growth," continues Ms Diron.
These domestic factors are impinging on economic activity to a greater extent than previously envisaged and have driven a downward revision in Moody's 2015 forecasts for many countries and regions, including the euro area, Japan and Brazil. In contrast, Moody's expects sustained robust growth in the US, UK and India over the next two years.
Moody's expects robust growth in the US over the next two years (+3% and +2.8% in 2015 and 2016 respectively), as strong job creation and favourable financing conditions create an environment conducive to realise pent-up demand for consumption. Meanwhile, strong profits and low external financing costs will continue to foster investment by US companies, whilst relatively brighter growth prospects in the US will tend to favour investment at home rather than abroad.
In Brazil, slower exports to China have exacerbated underlying weaknesses and drive Moody's GDP growth forecasts of around 1% in 2015. An elevated level of government debt limits the room for fiscal stimulus measures, whilst high inflation constrains the central bank's ability to ease monetary policy in support of growth and hampers purchasing power and consumption. Moreover, underinvestment has resulted in deficient infrastructure. Reforms to address these deficiencies will take time to come to fruition and hence have a limited visible effect on GDP growth over the next two years.
Moody's expects Chinese GDP growth will slow to just below 7% in 2015. The slowdown in the Chinese property sector is underway as less abundant credit is dampening demand for property, and large inventories are exerting downward pressure on prices. Weaker activity in property and thereby construction is spilling over to other sectors of the economy. More generally, lower credit growth is dampening fixed asset investment, the main engine of rapid growth in recent years. Annual growth in fixed asset invest investment has decreased from around 20% throughout 2013 to around 16% by September 2014. These trends reflect the policy objective to rebalance the economy away from debt-fuelled investment towards consumption, and will continue over the next two years.
Lacklustre global demand will act as a drag on Japan's GDP growth, significantly reducing the economic benefits that the country may have gained from the boost to competitiveness, which has resulted from the weakening of the yen. In 2014-16, Moody's forecasts growth in Japan's export markets to average 3.8%, two percentage points lower than over 2003-07.
Moreover, investment growth is hampered by labour market rigidities, a shrinking population which points to low growth in domestic sales and potential skill shortages, and uncertainty about the nature and effects of the government's policies. Furthermore, in the next few years, tighter fiscal policy including next year's planned second increase in the consumption tax - which we assume will take place - will curtail domestic demand.
However, economic activity will be supported by monetary stimulus which gives scope to implement fiscal and economic reforms.
In contrast, India is set to buck the trend, with GDP growth set rise to more than 6% in 2016 from just under 5% in 2015. Although exports account for a significant part of the economy, India benefits from diversified export markets that have sheltered the economy from the slowdown in China and muted growth in the euro area and Japan. Moreover, India's more favourable demographics fuel robust consumption growth and ensure ongoing rapid increases in the labour force. India is also a net commodity importer and will therefore benefit from the fall in commodity prices which will help lower inflation, in particular at a time when fuel subsidies are being removed.
