Risks to global growth have increased since November and world leaders have little left in their fiscal and monetary arsenals to mitigate the threat, Moody’s has warned.
In its quarterly Global Macro Outlook 2016-17 report released Thursday, the ratings agency said that growth prospects were being hammered by China’s slowdown, a slump in commodity prices and tighter financing conditions in some emerging markets.
This pain would outweigh factors helpful to growth, such as the loose monetary policy in Europe, Japan and the U.S., Moody’s said.
The credit rating firm said gross domestic product growth across the Group of 20 was expected to match the 2.6 percent rate reached in 2015, while only a slight tick up to 2.9 percent was seen for 2017. This average figure for 2016, however, masked the decline in Moody’s forecast range, which dropped 50 basis points at both the top and bottom end to sit at 2-3 percent.
Central banks, meanwhile, have limited room to battle the risks looming over growth, the report said.
“Where government budgets are hit by lower commodity prices and depreciating currencies fuel inflation, room to mitigate the downside risks is limited,” according to the report. “In Europe and Japan, elevated government debt continues to constrain fiscal policy while the efficacy of multiple rounds of quantitative easing is already being tested.”
The European Central Bank has set its key interest rates in negative territory for some time, and the Bank of Japan joined the club on January 29, which was read as a sign that the chance of Prime Minister Shinzo Abe’s “three-arrowed” program successfully stimulating the stagnant Japanese economy was running out.
Moody’s said the BOJ’s move would not be the hoped-for panacea for the country’s struggle to achieve 2 percent inflation.The ratings agency called the underwhelming response of the Japanese economy and a tumbling yen “discouraging,” and warned the central bank’s ambitious inflation target would remain elusive.
As for the euro zone, the region’s inability to inflate away debt will mean growth continued to be severely hampered by damaging leverage burdens, Moody’s said.
Moody’s also cut its gross domestic product (GDP) growth forecasts for Saudi Arabia, Russia, Brazil and South Africa. Lower oil prices and fiscal tightening to contain government debt hit the Saudis and the Russians, while record-low business confidence levels were Brazil’s weakness, Moody’s said.
Capital outflows, reflecting a lack of confidence in President Jacob Zuma’s government would hit South Africa’s growth, the agency added.
“GDP will shrink again this year in Brazil and Russia, by 3 percent and 2.5 percent respectively, growth will fall to close to zero in South Africa and will be around 1.5 percent, the lowest in decades, in Saudi Arabia,” Moody’s said in a statement.
Russia and Saudi Arabia are suffering from the 70 percent drop in oil prices recorded over the past 18 months, so much so that this week the two major oil producers agreed to cooperate on freezing oil production, as long as other producers also took part.
If successful, it would be the first accord between OPEC and non-OPEC oil producers in 15 years, but the deal looks shaky given that deal needs the agreement of OPEC member Iran, which is reluctant to give up any share of the market just after U.S.-led sanctions were lifted in January.
Moody’s forecasts 6.3 percent growth in China in 2016, down from 6.9 percent in 2015, but the 0.6 percentage point decline will feel worse that that on the rest of the world because the main slowdown will be in heavy industry sectors that were previously big importers, the agency warned.
China’s growth fell to a 25-year low of 6.9 percent in 2015, according to official data. Some economists, however, are skeptical of Beijing’s data, and say that the country’s real growth rate was closer to 4 percent. Worries about China’s economic slowdown has been one of the key drivers behind recent global stock market sell-offs.
Meanwhile, Indonesia would weather the commodity downturn relatively well, with Moody’s forecasting GDP growth of just under 5 percent, powered by increases in real incomes and moderating inflation.
Marie Diron, senior vice president at Moody’s Investor Service, told CNBC that “recent measures, aimed at really increasing investment, in particular, infrastructure, would really chime with that and give some room for the central bank to potentially ease monetary policy.
“So that really contrasts with other producers where policy space is much more constraint, and that’s where the relatively favorable picture comes from.”
Australia was another outlier, Moody’s said, applauding the country’s ability to offset mining job losses with a lift in employment in other sectors.
In the U.S., Moody’s did not see interest rates approaching the much-discussed 2 percent level this year, given the lack of inflationary signals. The report predicts GDP for the country to be flat on 2015 at around 2.4 percent, hampered by weak capital expenditure and persistently low productivity growth.
And the gain that the euro area has enjoyed from lower commodities prices are being tempered by high debt in some sectors and the lack of clear outlook the European Central Bank’s quantitative easing program, Moody’s said.
The ratings agency cautioned that the main risk to its forecast included a “marked depreciation” in China’s yuan, which would hit the profits of foreign companies that sold to China, cut the competitiveness of other emerging markets and fuel deflationary pressure in Japan and the euro zone.
The People’s Bank of China (PBOC) shocked markets in August with a 2 percent devaluation in the currency and has since been accused of intermittently manipulating the yuan as it attempts an orderly decline in value.
Chinese officials have repeatedly said that it was unrealistic to expect a serious yuan depreciation but some big hedge fund managers have predicted a far heavier devaluation – and are betting on the drop – with Kyle Bass of Texas-based Hayman Capital forecasting 30 percent depreciation against the dollar.
Bass and others have also warned that China’s banks cannot keep lending at their current pace because of looming bad debts; lending to government infrastructure programs has been key to propping up Chinese growth.
The PBOC, meanwhile, has been rebuked by the International Monetary Fund for its poor communication with markets on its yuan moves; the IMF had given China a show of support in November by agreeing to include the currency in its benchmark special drawing rights (SDR) currency basket, a move that required the yuan to be freely floating.
Other risks included rising geopolitical tensions that could increase risk-off sentiment and lead to volatility in financing, and the end to free movement of people within the European Union, the report said, which is a possible outcome of the area’s migrant crisis.
Although some market players have claimed that the broad-based asset sell-off this year was divorced from healthy economic fundamentals, Moody’s bleak global economic assessment follows the IMF’s recent cuts to its global growth forecasts, as well as pessimistic comments from the Institute for International Finance and the Bank of International Settlements, among others.
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