Global economy on course for muted growth this year and next, says Moody's

Slowdown in China a major factor but ratings agency says UK growth is ‘robust and broad-based’ despite forecasting pace of expansion slowing to 2.4%

Following sharp falls on its stock markets last month, China’s surprise currency devaluation last week only heighten fears about the state of its economy and the potential impact on the rest of the world. Photograph: Corbis

The global economy is on course for muted growth this year and next as it faces risks from a slowdown in China, the prospect of higher interest rates in the US and the lingering threat
of a Greek exit from the euro, according to the latest forecasts from Moody’s.
Outlining the list of potential shocks that could knock even modest expansion off course, the credit rating agency said it did not expect the world’s leading economies to shake off the legacy of the financial crisis and return to their former growth averages for the next five years.
Moody’s forecasts GDP growth for the G20 to slow to 2.7% this year, down from 2.9% in 2014. The agency is expecting only a slight pickup to 3% growth in 2016, according to its latest quarterly global outlook, which feeds into its ratings on countries’ sovereign debts.
“The recovery in the US and, to a lesser extent, the euro area and Japan, will be offset by the ongoing slowdown in China, low or negative growth in Latin America and only a gradual Russian recovery from its recession this year,” said the report’s author, Marie Diron.
“A sharp or long-lasting correction in asset prices in China is one of the risk factors which could result in lower G20 growth than in our baseline forecasts.”
Moody’s said UK growth appeared “robust and broad-based” although it forecast a slowing pace from 2.7% expansion this year to 2.4% in 2016. It said the Bank of England may starting raising interest rates gradually from early next year, as long as a recent pickup in wage growth is maintained. The latest official figures, however, showed UK earnings growth either stalled or fell, depending on the measure used.
The agency used its quarterly update to revise down its oil price forecasts following the sharp falls in recent months and continuing signs that supply continues to outpace demand. Moody’s now expects Brent crude to average $57 (£37) a barrel in 2016, only a little higher than the 2015 average of $55. The price of the North Sea benchmark has more than halved from its peak price of $115 a barrel last summer, trading at $49 on Monday.
Moody’s warning over threats to the outlook from China follows sharp falls on the country’s stock markets last month as officials in Beijing brought in emergency measures to stabilise prices and shore up confidence in the world’s second biggest economy.
China’s surprise currency devaluation last week only served to heighten fears about the state of its economy and the potential impact on the rest of the world. In the biggest one-off devaluation of its currency in two decades the country’s central bank allowed the yuan, also called the renminbi, to weaken by nearly 2% in a day. That was followed by two successive days of further markdowns in the value of the currency.
“The recent depreciation of the renminbi has added concerns about what it may portend for China’s economic growth,” said Diron.
Moody’s forecasts that the official measure of Chinese growth will slow from 7.4% last year to 6.8% this year and 6.5% in 2016, falling towards 6% in subsequent years.
The ratings agency also highlighted risks to the global economy from “a disorderly response” to the anticipated rise in US interest rates.
“The Federal Reserve has stated its intention to raise interest rates from later this year. However, future prices currently imply an expectation that rate increases may start later and proceed at a slower pace than implied by its open market committee’s projections. This gap presents a risk,” said Diron.
The US central bank has paved the way for its first increase in the cost of borrowing in nine years to come as soon as next month. That prospect has fanned fears of renewed volatility in emerging economies’ currency, bond, and stock markets as money floods out of them. If a rate rise does cause a shock in financial markets, Moody’s said Turkey and South Africa are among the more vulnerable countries.
In the eurozone the threat of Greece leaving the single currency has receded but not gone away, the ratings agency warned. Although Athens has clinched a new €86bn (£60bn) bailout package, Moody’s has forecast a “sharp recession” in Greece, as “capital controls, heightened risk of exit from the euro area in June and July and now lack of visibility about the policy and economic environment put spending on hold”.
For the eurozone as a whole, Moody’s forecast economic growth to rise from 0.9% last year to about 1.5% this year and next, helped by lower oil prices and a weaker euro. But there was as yet no evidence that structural reforms had significantly lifted the region’s growth potential, Diron said in her report.
The cautious eurozone outlook follows similar comments from rival ratings agency Fitch on Monday that the single currency bloc’s “medium-term growth prospects are generally weak”.
Responding to figures last week showing eurozone GDP growth slowed to 0.3% in the second quarter, from 0.4% in the first, Fitch said the news was still consistent with its view that the eurozone’s short-term economic outlook had improved. But it believes high debt and structural weaknesses will weigh on the recovery.
Fitch is forecasting eurozone economic growth of about 1.6% annually between 2015-2017.