Moody's: Muted global growth for another two years undermines resilience to negative shocks

Global growth will be lacklustre over the next two years as the slowdown in China and other emerging markets continues to weigh on the world economy, Moody's Investors Service said in a report published today. 

Moody's forecasts that G20 GDP growth will average 2.8% in 2015-17, only 0.3 percentage point higher than in 2012-14 and below the 3.8% average recorded in the five years before the global financial crisis. The rating agency's latest forecasts are broadly unchanged from its last quarterly Global Macro Outlook in August. 

"Muted global economic growth will not support a significant reduction in government debt or allow central banks to raise interest rates markedly," said the report's author Marie Diron, Senior Vice President, Credit Policy. "Authorities lack the large fiscal and conventional monetary policy buffers to protect their economies from potential shocks." 

G20 GDP growth is forecast to rise slowly to 2.8% in 2016 and 3% in 2017 from 2.6% in 2015. Emerging markets' contribution to G20 GDP growth in 2015-17 will fall to the lowest levels since the early 2000s. The combination of persistently low commodity prices and subdued global growth will maintain disinflationary pressures, weigh on revenues and hamper attempts to deleverage. 

The main risks to the economic outlook would stem from a bigger than expected global fallout from the Chinese slowdown and a larger impact from tighter external and domestic financing conditions in other emerging markets. 

"The direct effects on the global economy from both of these potential risks would likely be limited," Ms Diron adds. "However, advanced economies would be unable to do much to shore up global growth, given policymakers' limited room for manoeuvre on fiscal and monetary policy and the high leverage we're seeing in a number of sectors and countries." 

In China, Moody's forecasts GDP growth of just under 7% in 2015, 6.3% in 2016 and 6.1% in 2017. The gradual economic slowdown reflects a trade-off between further reforms - aimed at lessening the economy's dependence on investment and credit and increasing the influence of market mechanisms -- and the risk of jeopardising employment and social stability. 

Commodity prices are unlikely to rise significantly in the next few years. A large inventory build-up, a slow supply response and muted demand from China and other key importers will all weigh on prices. 

Moody's expects no significant rise in prices for energy, metal and mining commodities in the next two years. For commodity producers, the economic effects of low commodity prices will spill over into other sectors through supply chains and weaker growth in household income. 

As well as weaker commodity prices, a range of country-specific factors will contribute to lower growth in emerging markets and could lead investors to reassess growth and return prospects in some countries. For example, political uncertainty will be a negative factor in Brazil and Russia and infrastructure shortages will hamper growth in South Africa. 

Slow growth in emerging markets will not derail growth in advanced economies, where the economic outlook is likely to be supported by more accommodative monetary policy in the years ahead. Growth is expected to be broadly stable in the US, Europe and Japan. For 2015-17, Moody's forecasts average GDP growth at around 2.5% in the US, the UK and Korea and 1.5% for the euro area. 

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