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GLOBAL RISK PERSPECTIVES
CREDIT POLICY FEBRUARY 12, 2013
Table of Contents:
EXECUTIVE SUMMARY 1 FORECASTS FOR 2013-14: DOWNSIDE RISKS HAVE
DIMINISHED 2
Global synthesis 2 Continued weak growth in advanced economies 3
Prospects for emerging markets are broadly unchanged 8
DOWNSIDE RISKS TO THE FORECASTS HAVE DIMINISHED 10
The risk of a deeper than currently expected recession in the
euro area 11 Weaker-than-expected growth in major emerging markets
11 An escalation of geopolitical tensions 12
MOODYS RELATED RESEARCH 13
Analyst Contacts:
NEW YORK +1.212.553.1653
Elena Duggar +1.212.553.1911 Group Credit Officer - Sovereign
Risk [email protected]
Richard Cantor +1.212.553.3628 Chief Risk Officer
[email protected]
Bart Oosterveld +1.212.553.7914 Managing Director - Sovereign
Risk [email protected]
Madhi Sekhon +1.212.553.3780 Associate Analyst
[email protected]
LONDON +44.20.7772.5454
Colin Ellis +44.20.7772.1609 Senior Vice President
[email protected]
Antonio Garre +44.20.7772.1089 Associate Analyst
[email protected]
Global Macro Outlook 2013-14: Downside Risks Have Diminished
Executive Summary
After deteriorating during the past year, global economic
prospects appear to have stabilized in recent months. Financial
market conditions have been relatively benign, compared with the
turmoil seen during the first half of 2012, and there are
encouraging signs that growth could strengthen in the worlds three
largest economies during the course of this year.
In the G-20 advanced economies, survey evidence continues to
suggest a gradual strengthening in growth prospects. However,
European economies continue to lag behind the US, and only Japan
has announced significant policy stimulus. While business
confidence should strengthen as the economic situation improves,
fiscal consolidation and high unemployment will continue to impede
recovery. Overall, we expect real GDP growth in the G-20 advanced
economies of around 1.4% in 2013, followed by 2.0% in 2014. Growth
during the coming year is expected to be a little weaker than we
previously thought, reflecting recent poor data outturns.
We continue to expect growth in the G-20 emerging economies to
outpace other G-20 members. But there is limited prospect of a
swift return to the strong pace of expansion seen during 2010 and
2011, despite encouraging developments in China, as emerging
economies continue to rebalance away from external demand in the
face of weak world trade growth. Overall, we expect real GDP growth
in these economies to be a little over 5% in 2013, followed by a
modest pickup towards 6% in 2014. This forecast is broadly
unchanged from November 2012.
Given the relative stability of our forecasts since November,
the most notable change to our global outlook is that downside
risks to growth appear to have significantly diminished. In
particular, the full scale of the potential disruption to the US
economy from the so-called fiscal cliff was avoided, financing
stresses in the euro area have somewhat eased, and there are
increasing signs that key emerging markets will manage to avoid an
overly sharp slowdown in growth. Yet despite these developments the
risks to our forecasts remain skewed to the downside, stemming in
particular from the following scenarios:
A deeper than currently expected recession in the euro area
accompanied by deeper credit contraction, potentially triggered by
a further intensification of the sovereign debt crisis.
Weaker-than-expected growth in major emerging markets after the
recent slowdown.
An escalation of geopolitical tensions, resulting in adverse
economic developments.
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GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
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Moodys Global Macro Outlook underpins our universe of ratings,
providing a consistent benchmark for analysts and investors. This
report is an update to our November 2012 Global Macro Risk
Scenarios report.1 It reviews key recent developments, provides an
update on our baseline forecasts for 2013-2014 and discusses the
key risks around our forecasts.
Forecasts for 2013-14: Downside Risks have Diminished
Global synthesis
Global economic growth has shown signs of stabilization in
recent months. Most advanced economies are still seeing very slow
recoveries or further declines following the recessions of 2008/9,
reflecting gradual adjustments to excesses built up prior to the
financial crisis. As such, our overall outlook for economic growth
is broadly unchanged from three months ago. We still expect
relatively weak growth to persist for several economies over the
next few years, but we now see fewer potential stumbling blocks on
the path to global recovery . In particular, US policymakers
avoided the full scale of fiscal tightening implied by the
so-called fiscal cliff, and there have also been encouraging signs
of improvement in some major emerging markets, most notably China.
Also, financial markets, most notably in the euro area, have
experienced a period of relative calm, which contrasts with the
turbulence they saw during the first half of last year. However,
these factors are unlikely to spur economic activity significantly,
with private sector deleveraging and public sector austerity still
the dominant impediments to growth.
As a result, our forecasts are little changed from those in our
previous Global Outlook. We expect real GDP growth in the G-20
economies (weighted by nominal GDP at market exchange rates) to be
around 2.9% in 2013, followed by 3.3% in 2014. These growth rates
remain materially lower than the pace of expansion in 2010 and
2011.
The risks to our forecasts have significantly diminished since
the November 2012 update, but remain skewed to the downside despite
recent positive developments. Moodys believes that the three most
immediate risks are: i) the risk of a deeper than currently
expected recession in the euro area accompanied by deeper credit
contraction, potentially triggered by a further intensification of
the sovereign debt crisis; ii) slower-than-expected recovery in
major emerging markets following the recent slowdown; and iii) an
escalation of geopolitical tensions, resulting in adverse economic
developments.
We present our central scenario in Exhibit 1 but highlight the
following:
We express our forecasts for annual GDP growth and unemployment
as a range of one percentage point (ppt) to avoid spurious
precision and to focus on significant changes that could
potentially influence rating decisions.
We indicate the level of uncertainty for our central forecast.
We present ranges from the forecasts that we survey and compare
them to the historical standard deviation of the countries real
growth. The blue shading in Exhibit 1 denotes countries with
somewhat greater forecast uncertainty relative to historical GDP
volatility.
1 Update to the Global Macro Risk Outlook 2012-14: Slow
Adjustment to Weigh on Growth (146944), 12 November 2012.
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GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
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EXHIBIT 1
Moodys Central Forecast Scenarios for 2013-14
Notes: Green shading denotes improvement from the November 2012
update, orange denotes deterioration. Blue shading denotes
considerable forecast uncertainty relative to historical GDP
volatility. Growth figures for 2012 are estimates where official
data have not yet been published. [1] G-20 All includes nominal USD
GDP-weighted data for the 19 individual countries that comprise the
G-20. G-20 Advanced includes Australia, Canada, France, Germany,
Italy, Japan, the UK, and the US. [2] The percentage point
difference between the highest and lowest forecasts of sources such
as the IMF, WB, OECD, Eurostat, JPMorgan, Barclays, and Moodys. [3]
The standard deviation of real GDP growth over the 15 years to
2011. [4] In February 2012, the IMF approved a decision that calls
on Argentina to implement specific measures to address the quality
of reported GDP and Consumer Price Index data; on 1 February 2013,
the IMFs Executive Board found that progress had not been
sufficient and issued a declaration of censure against Argentina
under its Articles of Agreement.
Continued weak growth in advanced economies
The outlook for advanced economies is little changed from three
months ago, with many countries still struggling with the legacy
and fallout from the financial crises and recessions of 2008/9. The
long, painful process of deleveraging in parts of the private
sector still has much further to run, and fiscal consolidation
remains a priority for many governments. Confidence is relatively
weak, and there is still considerable uncertainty around the global
economic outlook, despite the dissipation of some downside risks.
Without strong impetus from external demand, this picture of a weak
appetite for risk in the private sector , alongside declining
government support as deficits are cut, implies a slow, gradual
process of adjustment and weak economic growth in many advanced
economies. This gradual pace suggests that the crisis will leave
lasting scars on many economies, and in some instances national
incomes may struggle to make up the lost ground implied by
pre-crisis trends. It also means that we
2011 2012 (E)Growth central range
Unemp't central range
Growth central range
Unemp't central range
2013 growth
range [2]
2014 growth
range [2]
GDP volatility
[3]
Argentina 8.9 3.2 3.0/4.0 -- 3.0/4.0 -- 1.1 1.3 6.4
Austra l ia 2.1 3.5 2.5/3.5 4.5/5.5 2.5/3.5 4.5/5.5 0.7 1.1
1.0
Brazi l 2.7 1.5 3.0/4.0 -- 3.5/4.5 -- 2.4 2.2 2.4
Canada 2.4 1.8 1.5/2.5 6.5/7.5 2.0/3.0 6.5/7.5 0.6 0.5 2.0
China 9.2 7.8 7.5/8.5 -- 7.0/8.0 -- 0.9 1.2 1.8
Euro area 1.4 -0.5 -0.5/0.5 -- 0.5/1.5 -- 0.9 0.8 1.9
France 1.7 0.2 -0.5/0.5 10.0/11.0 0.5/1.5 10.0/11.0 0.6 1.0
1.7
Germany 3.1 0.7 0.0/1.0 5.0/6.0 1.0/2.0 5.0/6.0 1.0 0.6 2.3
India 6.8 5.4 5.5/6.5 -- 6.0/7.0 -- 0.7 0.8 2.0
Indones ia 6.5 6.0 5.5/6.5 -- 6.0/7.0 -- 0.7 0.5 4.9
Ita ly 0.4 -2.4 -1.0/0.0 11.0/12.0 0.0/1.0 11.0/12.0 0.6 1.2
2.1
Japan -0.8 1.8 0.5/1.5 4.0/5.0 1.0/2.0 4.0/5.0 1.0 1.2 2.4
Mexico 3.9 3.8 3.0/4.0 -- 3.0/4.0 -- 0.6 0.9 3.8
Russ ia 4.3 3.5 3.0/4.0 -- 3.5/4.5 -- 1.0 0.5 3.3
Saudi Arabia 7.1 6.5 3.5/4.5 -- 3.5/4.5 -- 0.7 0.8 4.9
South Africa 3.1 2.5 3.0/4.0 -- 3.5/4.5 -- 1.0 1.0 2.6
South Korea 3.6 2.0 2.5/3.5 -- 3.0/4.0 -- 0.9 1.5 1.9
Turkey 8.5 3.0 3.5/4.5 -- 3.5/4.5 -- 1.3 1.5 5.1
UK 0.8 0.0 0.5/1.5 7.5/8.5 1.5/2.5 7.0/8.0 0.6 0.5 2.2
US 1.8 2.2 1.5/2.5 7.0/8.0 2.0/3.0 6.5/7.5 0.6 1.7 2.0
G-20 All 3.3 2.8 2.5/3.5 -- 3.0/4.0 -- -- -- --
G-20 Advanced 1.4 1.5 1.0/2.0 -- 1.5/2.5 -- -- -- --
G-20 Emerging 6.7 5.2 5.0/6.0 -- 5.5/6.5 -- -- -- --
Countries
Past growth 2013F 2014F Forecast uncertainty measures
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GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
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are unlikely to see a rapid return to more normal growth rates
in many economies, let alone the sort of above-trend rates that are
often seen once recessions have ended.
We expect the G-20 advanced economies to grow by around 1.4% in
2013, followed by 2.0% in 2014. One positive development over
recent months has been the stabilization of financial markets,
spurred by the ECBs announcement of its Outright Monetary
Transactions (OMTs) programme in September. This stabilization
should reduce uncertainty and aid the process of recovery in many
advanced economies, but any positive impact on growth will probably
be small. Fundamentally, households are still hesitant to spend
given high unemployment and debt levels, and the uncertain economic
outlook continues to weigh on firms hiring and investment
decisions. One positive factor is that commodity price pressures
still appear to be relatively contained (Exhibit 2). The spot price
of West Texas Intermediate (WTI) crude oil has picked up slightly
since November, standing at around $96/barrel at the start of
February, but remains significantly lower than its 2008 peak. The
price of Brent crude has also risen over the past three months.
Moodys central macroeconomic scenario is consistent with oil prices
rising gradually from these levels over the next two years.
EXHIBIT 2
Selected commodity prices Jan 2008-Jan 2013; 1 January 2008 =
100
Source: Haver Analytics.
EXHIBIT 3
WTI spot oil price and futures curve Jan 2008-Dec 2014
(a) At 8 February 2013. Sources: Haver Analytics and CME
Group.
The US economic outlook remains one of subdued growth during
2013. While politicians managed to avoid the full extent of the
so-called fiscal cliff, the package passed by both houses of
Congress on 1 January still encompassed fiscal tightening of around
1% of GDP this year. In addition, expenditure cuts that may be
decided on in the coming months could also still impede US growth.
As such, although the 1 January package mitigated much of the
fiscal drag associated with the cliff, it did not eliminate it
altogether. Fiscal policy will weigh on US activity this year, and
policymakers still need to agree on further fiscal measures that
lower future deficits and stabilize US government debt dynamics
over the longer term.2
Further fiscal tightening will weigh on US growth, as was
evident in the advance reading of GDP for Q4 2012. The US economy
stagnated at the end of last year, with GDP falling 0.1% on an
annualized basis, with the weakness reflecting large drops in
inventories and defense spending. However, that weak outturn
followed upwardly revised growth of 3.1% in Q3. During 2012 as a
whole the US economy expanded by 2.2%, the fastest pace of growth
in the G7 (Exhibit 4), and the prospects for
2 See US Fiscal Package Has Limited Positive Credit
Implications, 10 January 2013.
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013
Corn SoybeanGold Silver
0
20
40
60
80
100
120
140
160
2008 2009 2010 2011 2012 2013 2014
WTI spot price WTI forward curve (a)
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private sector activity are brightening. New housing starts have
continued to increase, reaching the highest level since June 2008.
US energy production is also likely to jump significantly in coming
years, following the discovery of vast reserves of shale oil,
providing a boost to the domestic economy and limiting US reliance
on foreign oil imports. In addition, although the unemployment rate
edged up to 7.9% in January (Exhibit 5), non-farm employment
increased by 157,000, continuing the strong pace of job creation
seen during the second half of 2012.
EXHIBIT 4
G7 GDP growth 2012 (a)
(a) Estimates where official data are not yet published.
Sources: Haver Analystics and Moodys estimates.
EXHIBIT 5
US housing starts and unemployment Jan 2007-Jan 2013
Source: Haver Analytics.
All told, the greater impetus from the US private sector is
likely to broadly offset the drag on activity from more restrictive
fiscal policy, so that GDP growth in 2013 is likely to remain close
to 2%. Thereafter, we expect the US economy to expand at a somewhat
faster pace than is likely this year, closer to its long-run
average pace of growth.
In contrast, economic conditions in the euro area have continued
to deteriorate. Euro area GDP declined by 0.1% in Q3 2012 compared
with the previous quarter, marking a return to technical recession
following the decline of 0.2% in the second quarter. The euro area
economy is also likely to have shrunk in Q4, following the
revelation that German GDP declined by around 0.5% during that
period. During 2012 as a whole, euro area GDP is likely to have
fallen by around 0.5%.3
Among member states, peripheral economies continue to be hit
hardest. Portuguese GDP has now fallen by more than 5% since the
current decline started in late 2010, while Spain and Italy have
now both seen five consecutive quarters of economic decline
(Exhibit 6). Although data quality is poor, the Greek economy has
undoubtedly suffered the most, and has probably now shrunk by more
than a quarter since the start of the debt crisis. The necessary
structural adjustments in these economies have included painful
cuts in prices and wages often termed internal devaluations in
order to regain competitiveness and close external imbalances. At
the same time, austerity programmes designed to stabilize sovereign
debt dynamics have amplified declines in GDP and rises in
unemployment, while continued dislocations in credit markets mean
that finance is still more expensive in Italy and Spain than in
Germany or France (Exhibit 7).
3 The first estimate of Q4 2012 growth is scheduled for
publication on 14 February.
-3
-2
-1
0
1
2
3Percentage change on previous year
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0
200
400
600
800
1000
1200
1400
1600
2007 2008 2009 2010 2011 2012 2013
Per centThousands
of units
Housing starts (LHS) Unemployment rate (RHS)
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EXHIBIT 6
Euro area GDP levels Q1 2008-Q3 2012, Q1 2008 = 100
Source: Haver Analytics.
EXHIBIT 7
Non-financial corporations cost of bank funding (a) Jan 2007-Dec
2012
(a) New business excluding revolving loans and overdrafts.
Source: ECB.
While progress has been made in addressing structural imbalances
the necessary adjustments have much further to run, and the decline
in German national income at the end of 2012 is consistent with the
idea that weakness in the periphery is being transmitted throughout
the rest of the currency union. The aggregate unemployment rate
reached 11.7% in November and December 2012, a new record high.
Short-term indicators such as retail sales and industrial
production suggest that the euro area economy as a whole could
contract further in the first half of 2013. And the scope for
further policy support appears limited.
Against this discouraging backdrop, the period of relative calm
in financial markets has been accompanied by further positive
developments. Long-term government bond yields for Italy and Spain
have fallen further since November (Exhibit 8), boosting the
likelihood that these governments may not need to enter explicit
aid programmes. Concerns about deposit outflows from peripheral
banking systems have eased as levels have evened out (Exhibit 9).
And there have also been signs of stabilization in survey
indicators such as the European Commissions economic sentiment
indices and the Purchasing Managers Indices (PMIs), raising hopes
that the current recession will prove to be relatively shallow and
brief compared with the deep recession in 2008/9. However, it
remains to be seen whether this stabilisation will presage
improvements in confidence and orders; and indeed whether any
improvement in the survey data will be reflected in official
figures.
88
90
92
94
96
98
100
102
104
2008 2009 2010 2011 2012
Germany France Italy
Spain Portugal
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012
Germany Spain
France Italy
Annualised agreed rate (%)
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EXHIBIT 8
Ten-year government bond yields Jan 2009-Jan 2013
Source: Haver Analytics.
EXHIBIT 9
Banking system deposits (a) Jan 2007-Dec 2012; Indices, January
2007 = 100
(a) Non-MFIs (monetary and financial institutions) excluding
central government. Source: Haver Analytics.
In light of these mixed developments, the euro area economy as a
whole is likely to broadly stagnate during 2013, with positive
growth in the likes of Germany and Ireland offset by further
declines in national income in Spain, Italy, Portugal and Greece.
While our central view is that positive growth will resume during
2014 for several peripheral member states, the main downside risk
to our global forecast is that the current euro area recession
proves to be longer and deeper than expected.
After a strong GDP reading in the third quarter, boosted by
temporary factors, the UK economy fell back at the end of 2012. The
preliminary estimate of UK GDP growth was -0.3% in Q4 2012, raising
the potential prospect of triple-dip recession, and the economy saw
zero growth during 2012 as a whole. In the absence of effective
policy stimulus, we have again revised down our growth profile. The
broad outlook for the UK economy remains one of slow and bumpy
recovery over the next two years, with GDP growth likely to remain
below-trend in both 2013 and 2014.
The Japanese economy shrank by 0.9% in Q3 2012 compared with the
previous quarter. The scale of this sharp contraction was
unanticipated, and suggests that underlying weaknesses in the
worlds third-largest economy could be more pervasive than
previously thought. In the near term, Japanese growth is likely to
strengthen during 2013 and 2014 following Prime Minister Abes
announcement of a new fiscal stimulus, which is aimed at boosting
GDP by around 2%. However, previous fiscal stimuli have failed to
have much lasting impact on Japans economic performance. As such,
changes to the monetary policy regime could have a more durable
effect, particularly if the Bank of Japan (BoJ) successfully meets
its new 2% CPI inflation target. The BoJs recent announcement that
it will pursue open-ended purchases of government debt starting in
January 2014 suggests that it is prepared to shift to a more
aggressive policy stance. This is a critical step in order to raise
inflation expectations, which in turn is a pre-requisite condition
for meeting the new inflation target over the longer term. At the
same time, the steps taken by Prime Minister Abe could intensify
Japans credit challenges, in particular the need to reduce the
budget deficit in order to prevent deterioration in
creditworthiness to a level that could induce a funding
crisis.4
4 See Japans New Leader Faces Intensifying Credit Challenges, 18
December 2012.
02468
101214161820
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Germany France Italy
Spain Portugal IrelandPer cent
80
90
100
110
120
130
140
150
160
2007 2008 2009 2010 2011 2012
Spain Greece
Ireland Portugal
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Prospects for emerging markets are broadly unchanged
Alongside our relatively stable expectations for advanced
economies over the past three months, our forecasts for emerging
markets are also broadly unchanged. We continue to expect real GDP
growth in the G-20 emerging economies of a little over 5% in 2013,
followed by a modest pickup towards 6% in 2014. This significant
growth still represents a notable deceleration from the robust
growth rates seen during 2010 and 2011, following the financial
crisis and accompanying recessions in advanced economies.
The Chinese economy appears to have adjusted well during 2012.
Although exports to the EU declined last year, and exports to the
US also decelerated in the second half of the year, China managed
to grow its Asian export market, diversifying its customer base.
However, trade growth during 2012 as a whole fell back to
single-digit levels after the more rapid expansion in Chinese trade
during the preceding two years. Against this backdrop, the domestic
economy has shown signs of improvement, with short-term indicators
such as retail sales and industrial production suggesting a recent
gentle acceleration in activity (Exhibit 10). According to the
National Bureau of Statistics, Chinese GDP grew by 7.9% over the
four quarters to Q4 2012, a pick up from the corresponding figure
of 7.4% in Q3. Some of this near-term momentum could persist into
the first half of this year, as the lagged effect of past policy
loosening is still felt. However, we expect the Chinese authorities
to shift to a more neutral policy stance over the course of 2013.
Such a change would be consistent with a more moderate pace of
growth compared with the rapid expansion seen in recent years.
EXHIBIT 10
Chinese retail sales and industrial production Jan 2008-Dec
2012
Source: Haver Analytics.
EXHIBIT 11
Emerging market composite PMIs Jan 2008-Jan 2013, Indices (50 =
no change)
Source: Haver Analytics.
Other major emerging economies have struggled to match Chinas
recent shift towards more domestic-led growth. Indian industrial
output has been volatile, partly reflecting the timing of the
Diwali holiday, but has slowed with the deceleration in world
trade. The trade deficit may have peaked towards the end of last
year, but the persistent current account deficit indicates that the
economy is still struggling to rebalance towards domestic demand.
Survey indicators such as the PMIs also suggest some recent
improvement (Exhibit 11), but the mapping between these surveys and
official data is often imprecise at best. After several
disruptions, the Indian government has taken steps designed to
foster both short- and longer-term growth by boosting
infrastructure investment, including a new bill to speed up land
acquisition and more certainty around project timescales. However,
the economic
0
5
10
15
20
25
30
35
40
45
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Industrial production Wholesale and retail sales
Percentage changes on a year earlier
30
35
40
45
50
55
60
65
70
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Brazil China
India Russia
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impact of these measures remains to be seen. Overall, the Indian
economy still looks unlikely to see a swift pickup in growth to the
pace seen during 2010 and 2011.
After GDP growth slipped to a three-year low of around 1% in
2012, the Brazilian economy should see some acceleration in
economic activity during the current year. The slower pace of world
trade growth has hit Brazilian exports, with little sign of
domestic sales growth making up the difference. In part, the
weakness of domestic demand last year reflected relatively high CPI
inflation hitting households spending power. Inflation is set to
remain high in the near term, but should ease somewhat over the
course of 2013. The infrastructure spending associated with the
2014 Football World Cup and 2016 Olympics should also provide some
boost to activity, although the full impact is likely to
materialize only gradually. In the meantime, residual concerns
about energy supply could weigh on businesses appetite for
expansion, undermining growth in the face of relatively weak
external demand.
Smaller emerging economies generally continue to exhibit steady
growth compared with advanced economies. Emerging European
countries have been most affected by the euro area debt crisis,
with uncertainty and private sector retrenchment hitting confidence
and capital flows.5 But growth in other emerging markets, most
notably developing Asia and Africa, continues to hold up relatively
well.6 We expect this process to continue, thereby further closing
the gap albeit slowly between per capita income levels in advanced
and emerging economies. One challenge will be balancing the growing
desire among emerging economies to control potentially
destabilizing capital flows against their other monetary policy
objectives: Box 1 discusses this in more detail.
Box 1: Monetary policy in emerging economies Over the past few
years, central banks in a number of advanced economies have cut
policy rates to record lows, and then expanded their balance sheets
in order to provide further monetary stimulus.7 This has posed
something of a challenge for central banks in emerging markets,
with some accusations that the US and other advanced economies have
been debasing their currencies or exporting inflation to the rest
of the world. This box examines the recent role and impact of
monetary policy in emerging market economies.
Many emerging markets are relatively small, open economies. In
the absence of other policy instruments, this means that monetary
policy can do one of two things: it can either seek to maintain a
certain exchange rate, vis--vis some other currency; or it can seek
to control domestic inflation.
Importantly, by itself monetary policy cannot achieve both aims.
Exchange rates are relative prices, so by anchoring their currency
to the US dollar, for example, the monetary authorities essentially
have to mirror developments in US monetary conditions. Given the
substantial expansion of the Federal Reserves balance sheet, any
central bank wishing to peg its currency against the US dollar
would have had to similarly loosen policy, potentially leading to
overheating in the domestic economy. In contrast, an
inflation-targeting central bank would probably have let its
currency appreciate against the US dollar in order to contain the
upward pressure on prices that would have arisen from maintaining
an artificially low exchange rate.
5 See Central & Eastern European 2013 Sovereign Outlook:
Subdued Macro Picture Tempers Credit Strengths, 15 January 2013. 6
See for example Asia-Pacific 2013 Sovereign Outlook: Resilient to
Global Headwinds, 11 January 2013. 7 See Box 1 in Update to the
Global Macro Risk Outlook 2012-14: Slow Adjustment to Weigh on
Growth (146944), 12 November 2012.
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These contrasting outcomes are visible in the recent experience
of some emerging economies. Cambodia, for instance, has seen a
relatively stable exchange rate against the US dollar since 2005,
but relatively large increases in consumer prices. In contrast,
countries like Malaysia and Peru have seen a less pronounced pace
of inflation, while at the same time their currencies have
appreciated significantly against the US dollar. Other emerging
economies have seen their currencies depreciate against the US
dollar, and have seen very substantial increases in consumer prices
as a consequence (Exhibit B1).
EXHIBIT B1
Changes in emerging market exchange rates and consumer
prices
Sources: IMF and Moodys calculations.
This trade-off has led some emerging economies to return to
alternative policy instruments, in particular the re-introduction
of capital controls. These controls regulate capital flows into and
out of an economy, which have been a concern for many emerging
economies in the wake of the large capital inflows seen in recent
years, and can stabilize currency movements. However, the efficacy
of capital controls is uncertain, particularly short-term measures.
They can also have knock-on implications for other economies and
potentially impede the efficiency of global capital markets.
Ultimately, emerging market policymakers still face a difficult
balance in using the instruments at their disposal to foster
sustainable increases in real incomes.
Downside Risks to the Forecasts Have Diminished
The main downside risks to our forecast have diminished from
three months ago, and stem from the following:
A deeper than currently expected recession in the euro area
accompanied by deeper credit contraction, potentially triggered by
a further intensification of the sovereign debt crisis.
Weaker-than-expected growth in major emerging markets following
the recent slowdown.
An escalation of geopolitical tensions resulting in adverse
economic developments.
The crystallization of any one of these risks would pose a
threat to the outlook for global growth.
0
50
100
150
200
250
300
350
400
-80 -60 -40 -20 0 20 40 60
Percentage change in CPI (2005 to 2012)
Percentage change in domestic currency vs US dollar(2005 to
2012)
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The risk of a deeper than currently expected recession in the
euro area
Our central view is that the euro area economy will start
growing again during the second half of 2013. However, there remain
considerable downside risks to this forecast. In particular, there
is substantial uncertainty about the potential impact of the
further austerity that we expect in peripheral euro area member
states over the next few years: some peripheral countries are only
likely to achieve balanced primary budgets by 2015 or even later.
These deficit-cutting processes will weigh on growth, and fiscal
multipliers may be significantly larger than first thought.
With peripheral countries likely to be mired in austerity over
the medium term, there is a clear risk that this process acts as
more of a drag on aggregate euro area growth than we have assumed
in our central forecasts. Intra-euro trade is still critically
important for many members states, and prolonged weakness in the
periphery could spread to core countries. If Spain and Italy, in
particular, were to see further declines in GDP through to 2015
instead of a return to growth next year, that would weigh
significantly on the region as a whole, driving unemployment even
higher and threatening the fragile political consensus between
European leaders.
At the same time, any relaxation in governments commitments to
get their debt dynamics under control could trigger renewed market
disruption and financial pressure. Throughout the crisis, the
willingness of European policymakers to undertake painful yet
necessary reforms has waxed and waned as market pressure has
intensified and subsequently eased. As such, although market
conditions currently appear relatively benign, the situation
remains very fragile. Investors are currently giving policymakers
the benefit of the doubt, but that could change rapidly if concerns
about sovereign refinancing profiles resurfaced against the
backdrop of further falls in GDP and employment. The risk of a
disorderly outcome to the European debt crisis, which would result
in significant financial market dislocation and trigger a much
deeper and sharper downturn in the European economy, remains the
key downside risk to the global economy.
Weaker-than-expected growth in major emerging markets
The second serious threat to the global recovery is the
possibility of slower-than-expected growth in key emerging markets.
During 2012, our concerns about a possible hard landing in emerging
markets originally centred on China, but spread to other major
emerging economies such as Brazil and India, which were also
exhibiting decelerations in activity.
Recent data suggest that China, in particular, may have managed
to avoid a sharp and uncontrolled decline in its pace of economic
growth. But short-term indicators can be volatile, and the modest
recent improvement in retail sales and production growth could
prove partly ephemeral. In addition, the Chinese government is
likely to put economic policy on a more neutral footing in the
coming months, following the introduction of various stimulus
measures to cushion the downturn in growth. The recent robust
growth in non-bank financing, for instance, is unlikely to be
tolerated indefinitely by regulators. Even if the growth cycle has
turned, China will not expand at the rapid pace that was seen
during 2010 and 2011.
This has implications for Brazil and India, which to date have
not seen the same strengthening in domestic conditions as in China.
These economies are still struggling to make up for subdued export
demand in the wake of the deceleration in world trade. Given the
weak outlook for advanced economies and the moderation in China,
growth in India and Brazil could take longer than expected to
bounce back from the slowdown seen last year. Indian policymakers
previous efforts to liberalise the economy have been somewhat
sporadic, and it remains to be seen whether recent developments
act
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GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
RISKS HAVE DIMINISHED
as a spur to growth. Meanwhile, although Brazilian GDP growth
picked up to 0.6% in Q3 2012 (from 0.2% in the second quarter) that
was still a relatively weak pace of expansion. Industrial
production and retail trade both subsequently fell in November,
suggesting that the Brazilian economy is still struggling to regain
momentum.
In summary, while the possibility of a hard landing in key
emerging markets looks to have been averted, the near-term balance
of risks to growth in these economies remains on the downside. With
most advanced economies likely to see only sub-trend growth over
the next two years, key emerging economies will continue to act as
an important driver of worldwide economic activity.
Weaker-than-expected growth in these major emerging markets could
therefore have a significant impact on global growth.
An escalation of geopolitical tensions
Another key risk to our forecasts is the potential economic
fallout from growing geopolitical risks. Conflicts in Syria and
parts of Africa could spill over into neighbouring nations, and
tensions elsewhere could also damage global growth prospects. There
are two scenarios in particular that are of significant
concern.
First, tensions in the Middle East could potentially trigger a
supply-side oil shock, resulting in a significant jump in prices.
Such an increase, if sustained, would weigh on growth in most large
economies. While the recent discovery of US shale oil could reduce
the impact of Middle East supply disruptions over the longer term,
for now oil supply remains highly concentrated within the region.
The direct impact of an increase in oil prices on growth is likely
to be much less pronounced than in historic episodes, given the
reduced energy-intensity of economic activity in many advanced
economies. Nevertheless, the global recovery remains relatively
fragile and the impact of a sudden supply-led increase in oil
prices could be more significant than would be the case if the
economic backdrop were stronger. Options prices currently suggest
roughly a 20% chance that the price of WTI oil could increase by
$20 a barrel or more over the coming year. As such, Moodys
continues to believe that this risk remains a high severity tail
event with significant global implications.8
Second, the dispute between China and Japan over the
Senkaku-Diaoyu islands also poses a particular threat to global
growth. The likelihood of outright conflict remains relatively low,
but recent escalations in rhetoric and military presence indicate
the seriousness of this disagreement. Given the US defence
guarantee to Japan, the dispute has the potential to embroil the
worlds three largest economies in a damaging struggle. Even if
direct military action is avoided, as still seems most likely,
there are already signs that it could significantly disrupt trade
developments in Eastern Asia, most notably the trilateral free
trade negotiations between China, Japan and South Korea that began
in May last year.9 A further escalation of tensions could
potentially undermine growth in these economies and more broadly in
Developing Asia, one of the few regions to come through the recent
financial crisis relatively unscathed.
8 For more detail and past analysis, see Update to Our Global
Macro-Risk Outlook 2012-2013: Modest Growth and Resurfacing Oil
Price Risks, April 2012 and Global
Macro-Risk Scenarios 2011-2012: Oil Price Supply Shock Downside
Scenario, April 2011. 9 See In Japan-China Island Dispute, Both
Sides Have Something to Lose, 20 December 2012.
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CREDIT POLICY
13 FEBRUARY 12, 2013
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RISKS HAVE DIMINISHED
Moodys Related Research
Recent Global Macro Risk Scenarios:
Update to the Global Macro Risk Outlook 2012-14: Slow Adjustment
to Weigh on Growth, November 2012 (146944)
Update to the Global Macro Risk Outlook 2012-13: Euro Area Debt
Crisis Continues to Pose the Greatest Risk, August 2012
(145035)
Update to Our Global Macro Risk Outlook 2012-13: Modest Growth
and Resurfacing Oil Price Risks, April 2012 (141580)
Sovereign Related Research:
Argentinas Six Years of Underreporting Inflation is Credit
Negative, January 2013 (149310)
Brazils regulation to extend duration in fixed-income portfolios
is credit positive, January 2013 (148993)
Central & Eastern European 2013 Sovereign Outlook: Subdued
Macro Picture Tempers Credit Strengths, January 2013 (148700)
Irelands Bond Issue Is a Step Toward Regaining Full Capital
Market Access, January 2013 (148994)
Asia-Pacific 2013 Sovereign Outlook: Resilient to Global
Headwinds, January 2013 (148774)
US Fiscal Package Has Limited Positive Credit Implications,
January 2013 (148908)
In Japan-China Island Dispute, Both Sides Have Something to
Lose, December 2012 (148574)
Japans New Leader Faces Intensifying Credit Challenges, December
2012 (148472)
Debt Sustainability Remains a Concern Following Greeces Second
Default, December 2012 (148288)
Italys Political Turmoil Has Limited Credit Implications for
Sovereign, December 2012 (148250)
Moodys downgrades Frances government bond rating to Aa1 from
Aaa, maintains negative outlook, November 2012
European Commissions Upward Revision of Spains Deficit Targets
is Credit Negative, November 2012 (147509)
No Detrimental Effect from Sandy on US Sovereign
Creditworthiness, November 2012 (147013)
Selected Banking and Corporate Sector Research:
Rising Risks, Receding Government Support, Cause Shift in Bank
Credit Profiles, December 2012 (147334)
EU Single Supervisory Agreement Is Credit Positive for Banks and
Sovereigns, December 2012 (148351)
Liikanen Group Proposals for Tougher EU Bank Regulation Are
Credit Positive, October 2012 (145993)
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CREDIT POLICY
14 FEBRUARY 12, 2013
GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
RISKS HAVE DIMINISHED
Spanish Banks Upcoming Recapitalization is Credit Positive, but
May Be Insufficient, October 2012 (145834)
EU Sovereign Crisis Poses Growing Risks For Some European
Non-Financial Companies, July 2012 (143282)
London 2012 Olympics Provide a Short-term Boost, But No Gold
Medal for Corporates, May 2012 (141487)
Euro Area Debt Crisis Weakens Bank Credit Profiles, January 2012
(139781)
To access any of these reports, click on the entry above. Note
that these references are current as of the date of publication of
this report and that more recent reports may be available. All
research may not be available to all clients.
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CREDIT POLICY
15 FEBRUARY 12, 2013
GLOBAL RISK PERSPECTIVES: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE
RISKS HAVE DIMINISHED
Report Number: 149555
Author Colin Ellis
Production Associate Sarah Warburton
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Executive SummaryForecasts for 2013-14: Downside Risks have
DiminishedGlobal synthesisContinued weak growth in advanced
economiesProspects for emerging markets are broadly unchangedBox 1:
Monetary policy in emerging economies
Downside Risks to the Forecasts Have DiminishedThe risk of a
deeper than currently expected recession in the euro
areaWeaker-than-expected growth in major emerging marketsAn
escalation of geopolitical tensions
Moodys Related ResearchRecent Global Macro Risk
Scenarios:Sovereign Related Research:Selected Banking and Corporate
Sector Research: