Moody's upgrades Eurozone forecasts but Trump inaction causes US downgrade

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German industry will drive faster Eurozone growth, Moody's said (Source: Getty)

Influential ratings agency Moody’s Investors Service has today upgraded its forecasts for an increasingly confident Eurozone economy, but added that US output will grow less quickly than previously thought.

GDP growth in the Eurozone will hit 2.1 per cent for this year as a whole, followed by 1.9 per cent next year, the agency said in its quarterly economic forecasts.

That represented a big jump from the 1.7 per cent 2017 growth expected only in May.

Since then, however, the European recovery has picked up pace, with survey evidence suggesting that industry across much of the bloc will increase its output, as optimism increases for consumers and business.

“Robust survey indicators in euro area countries suggest that growth should accelerate through the rest of the year,” said the report’s author, Madhavi Bokil, a vice president at Moody’s.

Read more: Why is the euro surging against sterling and the US dollar?

While some analysts believe the Eurozone economy is reaching a peak in acceleration, business confidence rebounded to its second-highest level since April 2011 in August as production expectations increased, according to European Commission data released today.

European businesses have been buoyed by the stronger growth through most of the Eurozone. This came despite a deterioration in export order books, likely caused by the sharp rise in the value of the euro over the summer.

Consumer confidence in the Eurozone stayed steady in August near high levels not seen since the start of the financial crisis a decade ago, the European Commission said.

Europe’s faster growth will be driven by an uptick in the expansion in Germany. Output in the continent’s industrial powerhouse will hit 2.2 per cent this year and two per cent in 2018, much faster than the 1.6 per cent predicted only in May. UK growth is expected to slow to 1.5 per cent in 2017 and one per cent next year.

In contrast, growth in the US economy will be slower than previously predicted, Moody’s predicts.

The world’s largest economy by output will grow by 2.2 per cent and 2.3 per cent this year and next, both 20 basis lower than previous forecasts, Moody’s said.

Lower forecasts have been prompted by policy inaction from the administration of US President Donald Trump.

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Bokil said: “The lower growth forecast for 2018 reflects expectations of a more modest fiscal stimulus than previously assumed. We don’t expect a major infrastructure bill to pass in 2017 or 2018.”

Meanwhile, infrastructure spending funded through tax credits would not add the fiscal boost that markets had predicted. Trump campaigned on a platform promising $1 trillion in infrastructure spending, but his travails in passing health care legislation have prompted investors to doubt his ability to pass a bill raising spending dramatically.

Bokil added that the stimulative effect on the economy of planned tax cuts for the wealthy “is likely to be smaller than assumed in the administration’s budget”, because richer people are less likely to spend money gained from lower taxes.

Read more: Sterling hits eight-year low against euro as strong EU industry surprises

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