Moody's: Leading Asian economies to sustain growth; G20 to grow 3% in 2017 and 2018

Moody's Investors Service says that the G20 economies will collectively grow at an annual rate of slightly more that 3% in 2017 and 2018, higher than the 2.6% recorded in 2016.

Moody's further expects that the synchronized global economic expansion currently underway will continue for the rest of 2017 and 2018. With considerable slack remaining in some euro area economies and some emerging market countries, the current pace of growth of around 2% in the advanced economies and more than 5% in emerging markets is not only sustainable in the near term, but also has potential for upside.

For Asia Pacific, surprisingly strong data for 1H 2017 have prompted upward revisions to 2017 growth forecasts for China, Japan and Korea.

Moody's views are presented in its just-released "Global Macroeconomic Outlook (August 2017 Update): Above-potential growth in advanced economies propels economic expansion."

For the region and globally, the balance of risks is more favorable than at the beginning of the year, but Moody's remains concerned about 1) event risks related to conflicts in the Korean Peninsula, the South China Sea, and the Middle East; 2) financial market volatility stemming from sudden changes in market expectations regarding monetary policy tightening in the advanced economies; 3) US trade policy turning protectionist; and 4) unanticipated spillovers from the implementation of deleveraging measures in China.

"A significant escalation of any of the situations in Korea, the South China Sea and other areas could have significant negative credit implications for the region," said Elena Duggar, an associate managing director at Moody's.

Given solid first and second quarter real GDP growth at 6.9%, we have revised -- as indicated --- China's 2017 forecast to 6.8%, from 6.6%, and 2018 forecast to 6.4% from 6.3%.

"Strong growth in the first half of the year is accounted for by China's strong infrastructure spending, said Madhavi Bokil, a vice president at Moody's. "With GDP growth set to reach this year's target, we continue to expect it to decelerate gradually over the years, as less policy stimulus is provided and as the authorities seek to balance their renewed commitment to slowing the growth of leverage while continuing to meet growth targets."

For Australia, GDP growth for 2017 will likely rise to 2.5% from 2.4% in 2016 and then 2.7% in 2018. Australia faces challenges with a large buildup of household debt alongside a rapid increase in housing market imbalances, which pose risks as the interest rate cycle reverses over time. A rise in borrowing costs will increase financial pressures on highly indebted households.

In India, demonetization, which led to several months of acute cash shortages from November 2016, adversely affected the manufacturing and construction sectors in particular. The economy decelerated in the first quarter of 2017, registering a real GDP growth rate of 6.1% year-on-year, down from 7% in the previous quarter.

However, Moody's believes that growth will firm in the second half of 2017 as the impact of demonetization slowly diminishes. Accordingly, Moody's has made only a marginal downward revision of India's real GDP growth forecasts to 7.1%, from 7.2%, for the calendar year 2017.

In Japan, the economy grew at 2% y-on-y in Q2 2017, following 1.5% growth in the first quarter. Importantly, the most recent second quarter GDP report shows a domestic demand driven upturn in growth.

Unequivocally positive recent data and forward-looking survey indicators have prompted us to revise the 2017 and 2018 forecast up from 1.1% and 0.8% respectively. We expect Japan's economy to grow above potential at 1.5% in 2017.

Our slightly lower, but still above potential, real GDP growth forecast for 2018 at 1.1% assumes smaller fiscal support for the economy.

Moody's also revised South Korea's growth forecast to 2.8% for 2017 and 2.5% for 2018, up from 2.5% and 2.0% respectively. Korea's real GDP grew at 2.7% year-on-year in Q2 2017, following 2.9% growth in the first quarter.

Moody's revised growth forecasts for the US to 2.2% in 2017 and 2.3% in 2018, down from 2.4% and 2.5%, respectively. At these growth rates, US GDP growth is above Moody's estimates of the economy's long-run potential. The revisions in 2017 are a result of weaker-than-expected performance in the first half of the year, and the revision to our forecast for 2018 reflects our expectation of a more modest fiscal stimulus than previously assumed.