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updated: 11/12/2012 6:24 AM

Moody's revises sown G-20 growth forecasts as austerity bites

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Bloomberg News

Moody's Investors Service lowered its forecasts for economic growth in the Group of 20 nations, citing budget cuts and financial-market uncertainty.

Real gross domestic product growth for the G-20 as a whole will be about 2.7 percent in 2012, 3 percent in 2013 and 3.3 percent in 2014, Moody's said in a report published today. For the advanced economies in the group, growth next year will be about 0.5 percentage points lower than forecast in August. While growth in emerging economies will outpace that of developed nations, prospects there have also moderated, the ratings company said.

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"In the G-20 advanced economies, we expect only a gradual strengthening in growth over the coming two years," Moody's said in the report, an update to its Global Macro Risk Outlook. "Fiscal consolidation and volatility in financial markets will continue to weigh on business and consumer confidence, while heightened uncertainty hampers spending, hiring and investment decisions."

Major economies from the U.S. to China are facing headwinds as Europe still struggles to overcome the sovereign debt crisis. As the U.S. faces the so-called fiscal cliff, which without a political deal would result in growth-choking tax increases and spending cuts, countries including Spain and Italy are embarking on austerity measures to rein in budget deficits.

'Slow Progress'

"The slow progress in tackling structural issues has contributed to weak economic recoveries from the 2008-2009 recession in advanced economies," Moody's said in the report. "The risks to our forecasts remain skewed to the downside."

Uncertainty surrounding the U.S. fiscal outlook continues to pose a significant risk to global growth, according to the report. Policy makers need to balance reducing the national debt by fiscal tightening and preserving fragile economic growth, it said.

While action from the European Central Bank and the Federal Reserve helped mollify the financial crisis in its first years, expanded balance sheets now are beginning to pose risks of their own, Moody's said.

"Inflation is a monetary phenomenon, and so by expanding the provision of central bank reserves and increasing the stock of narrow money there is a risk that inflation could pick up sharply in the future," it said. "The reliance on previously untested policies and transmission mechanisms increases the uncertainty around future economic prospects."

--Editors: Matthew Brockett, Andrew Atkinson

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1bloomberg.net

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