Global growth will be held back by the gradual slowdown in China and the weaker picture in other emerging markets in the next two years, says Moody’s Investors Service in a report published Tuesday.
The New York City-based credit rating forecasts that G20 gross domestic product (GDP) growth will average 2.8% in 2015-2017, which is well below the 3.8% average recorded in the five years before the global financial crisis.
“Muted global economic growth will not support a significant reduction in government debt or allow central banks to raise interest rates markedly,” says the report’s author Marie Diron, senior vice president, credit policy, at Moody’s, in a statement. “Authorities lack the large fiscal and conventional monetary policy buffers to protect their economies from potential shocks.”
The report predicts that G20 GDP growth will rise slowly to 2.8% in 2016 and 3% in 2017 from 2.6% in 2015. The contribution from emerging markets is seen falling to its 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,” Moody’s says in a statement.
The main risks to its outlook include bigger than expected impact from the Chinese slowdown, and a larger than forecast impact from tighter external and domestic financing conditions in other emerging markets, Moody’s says.
“The direct effects on the global economy from both of these potential risks would likely be limited,” Diron says. “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.”
For 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 jeopardizing employment and social stability,” Moody’s says.
As well, 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,” the credit rating agency says.
In addition to weak commodity prices, a range of country-specific factors will contribute to lower growth in emerging markets, Moody’s says. For example, political uncertainty will be a negative factor in Brazil and Russia, Moody’s says, and that infrastructure shortages will hamper growth in South Africa.