Source: CNBC
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 a 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. And central banks have limited room to battle these risks, 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, whichwas 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.
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.
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 a 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. And central banks have limited room to battle these risks, 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, whichwas 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.
In response, Moody's 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, having only just emerged from painful U.S.-led sanctions.
Moody's forecasts 6.3 percent growth in China in 2016, down from 6.9 percent in 2015, but the impact on the rest of the world will feel worse than 6 percent-plus growth would be expected to feel 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 is 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."
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, having only just emerged from painful U.S.-led sanctions.
Moody's forecasts 6.3 percent growth in China in 2016, down from 6.9 percent in 2015, but the impact on the rest of the world will feel worse than 6 percent-plus growth would be expected to feel 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 is 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."
Moody's forecasts growth of 2.3 percent in the U.S. this
year, largely unchanged on 2015, as household spending continues to grow
but non-residential investment remains weak.
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 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. 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 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.
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.
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