Global economic growth will continue to be weak for the next couple of years and downside risks remain, resulting in a negative outlook for sovereign credit ratings, according to a new report from Moody’s Investors Service Inc.
Specifically, the New York-based credit-rating agency sees global growth climbing to about 3% for each of the next two years, up from 2.6% in 2016. The modest improvement is to be driven by expected growth pickups in the U.S. and certain emerging markets.
The U.S. economy is forecast to grow by 2.2% in 2017 from around 1.6% this year, the Moody’s report says, “as consumer spending is supported by healthy job and wage prospects, even as business investment remains weak.”
However, the risk outlook for the U.S. economy is now clouded by political uncertainty following Donald Trump’s victory in the U.S. presidential election.
“While prolonged policy uncertainty could weigh on already weak investment growth, there could be an upside to growth in the short term from increased fiscal expenditure, tax cuts or higher infrastructure spending,” says Madhavi Bokil, vice president and senior analyst with Moody’s, in a statement. “A restrictive stance on trade would be detrimental in the medium term.”
Meanwhile, a pickup in growth in emerging markets will be driven by improvements in both the political environment and the economic sentiment in countries such as Brazil and Argentina, as well as by reforms in India and Indonesia, the Moody’s report says. China’s economy has continued to grow at a solid pace, in part through fiscal and monetary policy support, it adds.
“After five years of steady deceleration, emerging-market economies are poised to return to faster growth in 2017,” says Elena Duggar, associate managing director with Moody’s, in a statement. “Although growth is improving, we expect it to be considerably lower than what emerging markets experienced in the years leading up to the financial crisis.”
Moody’s expects G20 emerging market growth to average about 5% in 2017 and 2018, up from an estimated 4.4% in 2016.
Amid the relatively weak growth forecast, overall, the Moody’s report also says that the outlook for sovereign ratings globally for the coming 12 to 18 months is negative.
“The key drivers of the negative outlook are a combination of continued low growth, a shift toward fiscal stimulus that will increase already high public sector debt, and rising political and geopolitical risks,” Moody’s says in a separate report. “Many emerging markets remain exposed to the risk of a reversal in capital flows.”
“One of the key credit constraints for most rated sovereigns is the persistently low growth environment,” says Alastair Wilson, managing director, sovereign risk, at Moody’s, in a statement. “Monetary policy’s ability to support growth in advanced economies is diminishing, and in many emerging markets it is constrained by above-target inflation and exchange-rate pressures. So, we are seeing a gradual but broad-based shift in policy toward loosening fiscal policy in order to lift growth.”
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