Moody's: Increased risks to global growth cloud outlook in 2016-17

Global growth will fail to pick up steam over the next two years as the slowdown in China, lower commodity prices and tighter financing conditions in some countries weigh on the economy, Moody's Investors Service said in a quarterly report today.

The downside risks to Moody's forecasts for G20 GDP growth of 2.6% in 2016 and 2.9% in 2017 have increased since the rating agency's last Global Macro Outlook in November. Furthermore, G20 policymakers in some countries have limited fiscal and monetary policy space to boost growth or mitigate these risks.

"We expect global growth to rise only very modestly in 2016-17," said Marie Diron, a Moody's Senior Vice President and co-author of the report. "The negative impact of commodity producers' adjustment to persistently lower prices, a marked slowdown in China's imports and tighter financing conditions for some emerging markets will outweigh positive factors, such as accommodative monetary policy in Europe, Japan and in the US." "Where government budgets are hit by lower commodity prices and depreciating currencies fuel inflation, room to mitigate the downside risks is limited. In Europe and Japan, elevated government debt continues to constrain fiscal policy while the efficiency of multiple rounds of quantitative easing is already being tested." Diron adds.

The report, "Global Macro Outlook 2016-17: Global Growth faces rising risks at times of policy constraint", is available on www.moodys.com. Moody's subscribers can access this report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

In China, Moody's forecasts GDP growth of 6.3% in 2016 and 6.1% in 2017, compared to 6.9% in 2015 as the authorities use some of their available policy space to support the economy and foster a very gradual economic slowdown.

"China's slowdown will be concentrated in heavy industry sectors that are significant importers," Ms Diron added. "As a result, the impact of the slowdown on the rest of the world - when measured in terms of the value of exports to China and profits generated there - will be sharper than implied by China's GDP growth above 6%."

Moody's has revised down its GDP growth forecasts for Brazil, Russia, Saudi Arabia and South Africa. Lower oil prices, and additional fiscal tightening in order to contain government debt dynamics, account for the revisions for Russia and Saudi Arabia. In Brazil, the gains in price competitiveness and related strong export growth will not spill over to the domestic economy as long as business confidence remains at record-low levels. In South Africa, marked capital outflows in recent months reflect a lack of confidence in the government's ability to deliver growth-enhancing measures in the short term. Room for support is constrained for both fiscal and monetary policy. Moody's forecasts that GDP will shrink again this year in Brazil and Russia, by 3% and 2.5% respectively, growth will fall to close to zero in South Africa and will be around 1.5%, the lowest in decades, in Saudi Arabia.

In the United States, Moody's forecasts GDP growth of 2.3% in 2016 and 2.5% in 2017, broadly unchanged from last year. The recent correction in financial asset prices poses some downside risks to the US forecast if tighter financing conditions weigh more significantly on investment than we currently assume. Moody's anticipates that the US Federal Reserve will continue to raise interest rates gradually, with the Fed funds rate at around 1.75% by the end of 2017.

Lower prices for oil and other commodities have provided a boost to economy activity in the euro area. But these gains are tempered by persistently high debt in some sectors and uncertainty over the success of multiple rounds of quantitative easing. Moody's GDP growth forecast for the region is unchanged at 1.5% in both 2016 and 2017. In Japan, GDP growth is expected to be below 1% both this year and in 2017, despite the boost from lower commodity prices and the weaker yen. The Bank of Japan's 2% inflation target will remain elusive, despite negative policy interest rates.

The main risks to Moody's forecasts include a marked depreciation in China's renminbi. For China, the potential gains in price competitiveness would be more than offset by renewed capital outflows in anticipation of a further weakening of the currency. A weaker renminbi would also reduce the profits of foreign companies that sell to China, hamper the price competitiveness of other emerging markets and intensify disinflationary pressures in Japan and the euro area.

Other potential risks include heightened geopolitical tensions, particularly in the Middle East, that could lead to volatile financing conditions and increased risk aversion. Moreover, with very large differences in unemployment rates across European countries, cross-border flow of workers helps improve the match between demand and supply of labour and thereby the general functioning of labour markets and the economy. This would be jeopardised by long-lasting restrictions to the movement of people within the European Union.