Global growth will fail to pick up steam in next two years, Moody's warns

People walk in front of the financial district in Shanghai, China, on Jan 19, 2016.
People walk in front of the financial district in Shanghai, China, on Jan 19, 2016. PHOTO: REUTERS

Singapore - 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 out Thursday (Feb 18).

The downside risks to Moody's forecasts for GDP growth for the Group of 20 developed countries of 2.6 per cent in 2016 and 2.9 per cent in 2017 have increased since the rating agency's last Global Macro Outlook in November.

G20 policymakers in some countries have limited fiscal and monetary policy space to boost growth or mitigate these risks, said Moody's.

"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."

She added: "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."

For China, the world's second-lagest economy, Moody's forecasts growth will fall to 6.3 per cent in 2016 and 6.1 per cent in 2017, from 6.9 per cent in 2015.

"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 per cent."

For the US, the world's biggst economy, Moody's forecasts GDP growth of 2.3 per cent in 2016 and 2.5 per cent 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, said Moody's.

It anticipates that the US Federal Reserve will continue to raise interest rates gradually, with the Fed funds rate at around 1.75 per cent by the end of 2017 from 0.25-0.5 per cent now.

For Japan, GDP growth is expected to be below 1 per cent both this year and in 2017, despite the boost from lower commodity prices and the weaker yen. The Bank of Japan's 2 per cent inflation target will remain elusive, despite negative policy interest rates, said Moody's.

Moody's growth forecast for the euro region is unchanged at 1.5 per cent in both 2016 and 2017. Lower prices for oil and other commodities have provided a boost to economy activity in the euro area, said Moody's, but these gains are tempered by persistently high debt in some sectors and uncertainty over the success of multiple rounds of quantitative easing.

The main risks to Moody's forecasts include a marked depreciation in China's currency. 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 yuan. A weaker yuan 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.

Moody's Global Macro Outlook report underpins the company's ratings and provides a benchmark for analysts and investors.