Global growth halted by Europe, US and China risks

Kristin Forbes. Picture: Contributed
Kristin Forbes. Picture: Contributed
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THE global economy faces “muted” growth over the next two years, with the brakes being applied by risks from Europe, China and the US, an influential credit ratings agency warned today.

The latest 2015-16 growth forecasts for the G20 countries are below the average before the 2008 financial crisis, and are not expected to return to those averages within the next five years, said Moody’s Investors Service.

The recovery in US will be offset by the ongoing slowdown in China

Marie Diron

It came as the agency held its baseline forecast for G20 economic growth at 2.7 per cent this year, rising to 3 per cent in 2016 and compared with 2.9 per cent in 2014.

Moody’s said the main risks to these forecasts include the ongoing asset price deflation in China, the potential for a disorderly response to any rise in US interest rates, and the continuing possibility of a Greek exit from the euro area.

Marie Diron, senior vice president for credit policy and author of Moody’s report, said: “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.

“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.”

In a further cranking up of its forecast of a subdued economic backdrop for the rest of 2015 and 2016, Moody’s said the increase in world oil supply “continues to outpace demand”.

The agency has downgraded its oil price forecasts for Brent crude to an average $57 a barrel in 2016, only a little higher than the 2015 average of $55.

It warned that all the risks it has highlighted “would have a marked negative effect on the global economy compared with our current forecasts” if they crystallised.

Moody’s downbeat assessment of global growth prospects comes after a senior policymaker at the Bank of England warned that Britain’s economic recovery could be damaged if the Bank waited too long before raising historically low interest rates.
Kristin Forbes, a member of the Bank’s rate-setting monetary policy committee (MPC), said keeping rates at 
0.5 per cent, when economic growth had rebounded to levels seen before the financial crash, risked “creating distortions”.

The latest UK inflation data is due out today, with the consensus expectation that the consumer prices index will again come in close to zero, easing pressure on the MPC for a rate rise.

In its report, Moody’s maintained its baseline GDP forecast for China – increasingly the engine of the world’s economy – of 6.8 per cent this year and 6.5 per cent in 2016, before falling towards 6 per cent by the end of the decade. The agency also said that the recent stock market correction is “unlikely to have a significant impact on China’s GDP growth”, while moves to devalue the country’s currency “will also not have any marked economic impact”.

It painted a generally upbeat picture of US economic prospects, forecasting that stateside GDP growth will be at 
2.4 per cent in 2015 before rising to 2.8 per cent next year.

“Robust job creation, high corporate profits, favourable financing conditions and pent-up demand all point to higher (US) GDP growth,” the report said.

Moody’s euro area forecast is for growth of 1.5 per cent this year and in 2016, saying the weaker euro and lower oil prices have boosted the region’s economy.