Muted global growth for an­other two years un­der­mines re­silience to neg­a­tive shocks

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

Moody’s fore­casts that G20 GDP growth will aver­age 2.8% in 2015-17, only 0.3 per­cent­age point higher than in 201214 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 slowly to 2.8% in 2016 and 3% in 2017 from 2.6% in 2015. Emerg­ing mar­kets’ con­tri­bu­tion to G20 GDP growth in 201517 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,” Diron added. “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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