FEBRUARY 12, 2013 CREDIT POLICY
SPECIAL COMMENT Global Macro Outlook 2013-14:
Downside Risks Have Diminished
Table of Contents: Executive Summary
EXECUTIVE SUMMARY 1 After deteriorating during the past year, global economic prospects appear to have stabilized
FORECASTS FOR 2013-14: DOWNSIDE
RISKS HAVE DIMINISHED 2
in recent months. Financial market conditions have been relatively benign, compared with
Global synthesis 2 the turmoil seen during the first half of 2012, and there are encouraging signs that growth
Continued weak growth in advanced could strengthen in the world’s three largest economies during the course of this year.
Prospects for emerging markets are
broadly unchanged 8
In the G-20 advanced economies, survey evidence continues to suggest a gradual
DOWNSIDE RISKS TO THE FORECASTS strengthening in growth prospects. However, European economies continue to lag behind
HAVE DIMINISHED 10 the US, and only Japan has announced significant policy stimulus. While business
The risk of a deeper than currently confidence should strengthen as the economic situation improves, fiscal consolidation and
expected recession in the euro area 11
Weaker-than-expected growth in major
high unemployment will continue to impede recovery. Overall, we expect real GDP growth
emerging markets 11 in the G-20 advanced economies of around 1.4% in 2013, followed by 2.0% in 2014.
An escalation of geopolitical tensions 12 Growth during the coming year is expected to be a little weaker than we previously thought,
MOODY’S RELATED RESEARCH 13 reflecting recent poor data outturns.
Analyst Contacts: 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
NEW YORK +1.212.553.1653 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.
Elena Duggar +1.212.553.1911
Group Credit Officer - Sovereign Risk Overall, we expect real GDP growth in these economies to be a little over 5½% in 2013,
firstname.lastname@example.org followed by a modest pickup towards 6% in 2014. This forecast is broadly unchanged from
Richard Cantor +1.212.553.3628 November 2012.
Chief Risk Officer
email@example.com Given the relative stability of our forecasts since November, the most notable change to our
Bart Oosterveld +1.212.553.7914 global outlook is that downside risks to growth appear to have significantly diminished. In
Managing Director - Sovereign Risk 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
Madhi Sekhon +1.212.553.3780
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:
Colin Ellis +44.20.7772.1609 » A deeper than currently expected recession in the euro area accompanied by deeper
Senior Vice President credit contraction, potentially triggered by a further intensification of the sovereign debt
Antonio Garre +44.20.7772.1089
Associate Analyst » Weaker-than-expected growth in major emerging markets after the recent slowdown.
» An escalation of geopolitical tensions, resulting in adverse economic developments.
Moody’s 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 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. Moody’s 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.
Update to the Global Macro Risk Outlook 2012-14: Slow Adjustment to Weigh on Growth (146944), 12 November 2012.
2 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
Moody’s Central Forecast Scenarios for 2013-14
Past growth 2013F 2014F Forecast uncertainty measures
Growth Unemp't Growth Unemp't 2013 2014 GDP
2011 2012 (E) central central central central growth growth volatility
range range range range range  range  
Argenti na 8.9 3.2 3.0/4.0 -- 3.0/4.0 -- 1.1 1.3 6.4
Aus tra l i a 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
Bra zi l 2.7 1.5 3.0/4.0 -- 3.5/4.5 -- 2.4 2.2 2.4
Ca na da 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
Chi na 9.2 7.8 7.5/8.5 -- 7.0/8.0 -- 0.9 1.2 1.8
Euro a rea 1.4 -0.5 -0.5/0.5 -- 0.5/1.5 -- 0.9 0.8 1.9
Fra nce 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
Germa ny 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
Indi a 6.8 5.4 5.5/6.5 -- 6.0/7.0 -- 0.7 0.8 2.0
Indones i a 6.5 6.0 5.5/6.5 -- 6.0/7.0 -- 0.7 0.5 4.9
Ita l y 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
Ja pa n -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
Mexi co 3.9 3.8 3.0/4.0 -- 3.0/4.0 -- 0.6 0.9 3.8
Rus s i a 4.3 3.5 3.0/4.0 -- 3.5/4.5 -- 1.0 0.5 3.3
Sa udi Ara bi a 7.1 6.5 3.5/4.5 -- 3.5/4.5 -- 0.7 0.8 4.9
South Afri ca 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 -- -- -- --
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.  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.  The percentage point difference between the highest and lowest forecasts of sources such as the
IMF, WB, OECD, Eurostat, JPMorgan, Barclays, and Moody’s.  The standard deviation of real GDP growth over the 15 years to 2011.  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 IMF’s 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
3 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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 ECB’s 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. Moody’s central macroeconomic scenario is
consistent with oil prices rising gradually from these levels over the next two years.
EXHIBIT 2 EXHIBIT 3
Selected commodity prices WTI spot oil price and futures curve
Jan 2008-Jan 2013; 1 January 2008 = 100 Jan 2008-Dec 2014
WTI spot price WTI forward curve (a)
2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014
(a) At 8 February 2013.
Source: Haver Analytics. 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 1½% 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
See US Fiscal Package Has Limited Positive Credit Implications, 10 January 2013.
4 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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 EXHIBIT 5
G7 GDP growth US housing starts and unemployment
2012 (a) Jan 2007-Jan 2013
Percentage change Housing starts (LHS) Unemployment rate (RHS)
on previous year Thousands
2 Per cent
2007 2008 2009 2010 2011 2012 2013
(a) Estimates where official data are not yet published.
Sources: Haver Analystics and Moody’s estimates. 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).
The first estimate of Q4 2012 growth is scheduled for publication on 14 February.
5 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
EXHIBIT 6 EXHIBIT 7
Euro area GDP levels Non-financial corporations’ cost of
Q1 2008-Q3 2012, Q1 2008 = 100 bank funding (a)
Jan 2007-Dec 2012
Germany France Italy
Annualised agreed rate (%)
2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012
(a) New business excluding revolving loans and overdrafts.
Source: Haver Analytics. 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 Commission’s 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.
6 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
EXHIBIT 8 EXHIBIT 9
Ten-year government bond yields Banking system deposits (a)
Jan 2009-Jan 2013 Jan 2007-Dec 2012; Indices, January 2007 = 100
Germany France Italy Spain Greece
Spain Portugal Ireland Ireland Portugal
Per cent 160
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 2007 2008 2009 2010 2011 2012
(a) Non-MFIs (monetary and financial institutions) excluding
Source: Haver Analytics. 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 world’s 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 Abe’s 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 Japan’s 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 BoJ’s 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 Japan’s 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
See Japan’s New Leader Faces Intensifying Credit Challenges, 18 December 2012.
7 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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 5½% 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
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 EXHIBIT 11
Chinese retail sales and industrial production Emerging market composite PMIs
Jan 2008-Dec 2012 Jan 2008-Jan 2013, Indices (50 = no change)
Industrial production Wholesale and retail sales Brazil China
Percentage changes on a year earlier India Russia
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: Haver Analytics. Source: Haver Analytics.
Other major emerging economies have struggled to match China’s 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
8 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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
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
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-à-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
Reserve’s 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.
See Central & Eastern European 2013 Sovereign Outlook: Subdued Macro Picture Tempers Credit Strengths, 15 January 2013.
See for example Asia-Pacific 2013 Sovereign Outlook: Resilient to Global Headwinds, 11 January 2013.
See Box 1 in Update to the Global Macro Risk Outlook 2012-14: Slow Adjustment to Weigh on Growth (146944), 12 November 2012.
9 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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).
Changes in emerging market exchange rates and consumer prices
Percentage change in CPI (2005 to 2012)
-80 -60 -40 -20 0 20 40 60
Percentage change in domestic currency vs US dollar
(2005 to 2012)
Sources: IMF and Moody’s 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
» 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.
10 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
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
11 FEBRUARY 12, 2013 SPECIAL COMMENT: 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
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
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, Moody’s 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 world’s 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
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.
See In Japan-China Island Dispute, Both Sides Have Something to Lose, 20 December 2012.
12 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
Moody’s 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:
» Argentina’s Six Years of Underreporting Inflation is Credit Negative, January 2013 (149310)
» Brazil’s regulation to extend duration in fixed-income portfolios is credit positive, January 2013
» Central & Eastern European 2013 Sovereign Outlook: Subdued Macro Picture Tempers Credit
Strengths, January 2013 (148700)
» Ireland’s Bond Issue Is a Step Toward Regaining Full Capital Market Access, January 2013
» 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)
» Japan’s New Leader Faces Intensifying Credit Challenges, December 2012 (148472)
» Debt Sustainability Remains a Concern Following Greece’s Second Default, December 2012
» Italy’s Political Turmoil Has Limited Credit Implications for Sovereign, December 2012
» Moody’s downgrades France’s government bond rating to Aa1 from Aaa, maintains negative
outlook, November 2012
» European Commission’s Upward Revision of Spain’s 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
» EU Single Supervisory Agreement Is Credit Positive for Banks and Sovereigns, December 2012
» Liikanen Group Proposals for Tougher EU Bank Regulation Are Credit Positive, October 2012
13 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
» Spanish Banks’ Upcoming Recapitalization is Credit Positive, but May Be Insufficient, October
» EU Sovereign Crisis Poses Growing Risks For Some European Non-Financial Companies, July
» London 2012 Olympics Provide a Short-term Boost, But No Gold Medal for Corporates, May
» 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.
14 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED
Report Number: 149555
Author Production Associate
Colin Ellis Sarah Warburton
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15 FEBRUARY 12, 2013 SPECIAL COMMENT: GLOBAL MACRO OUTLOOK 2013-14: DOWNSIDE RISKS HAVE DIMINISHED