Moody's: Beware of global shockwaves from China

Moody's: Beware of global shockwaves from China

10 November 2015, 10:32

Escalating problems in emerging markets such as China will hamper global growth over the next two years, and could even threaten the stability of the global economy, ratings agency Moody's said in its latest warning.

It has cautioned that global growth will stay relatively sluggish - seven years on from the financial crisis - restraining efforts to ease the global debt crisis. Governments lack the ammunition to fight back, the agency says, if (or maybe when) the global economy is in trouble again.

There may simply be little space to manoeuvre with new financial or monetary stimulus, given the measures already taken since 2008 and the pressure to reduce deficits.

Marie Diron, senior vice-president of credit policy at Moody’s, explained:

“Muted global economic growth will not support a significant reduction in government debt or allow central banks to raise interest rates markedly.”

“Authorities lack the large fiscal and conventional monetary policy buffers to protect their economies from potential shocks.”

Moody’s projects that GDP growth across the G20 developed nations will average 2.8% in 2015-17. That’s well below the 3.8% average logged in the five years before the global financial crisis.

The huge threat is that China’s economy slows even faster than estimated.

"The main risks to the economic outlook would stem from a bigger than expected global fallout from the Chinese slowdown and a larger impact from tighter external and domestic financing conditions in other emerging markets."

Moody's thinks China’s GDP growth will slide to just under 7% in 2015, then 6.3% in 2016 and 6.1% in 2017, as authorities try to rebalance its economy. If that process falters, the global economy could hit rocks again.

Commodities will not rebound in the near future, the China slowdown suggests.

"A large inventory build-up, a slow supply response and muted demand from China and other key importers will all weigh on prices," Moody's says.

Supply chains in emerging markets, as well as household income growth in developing nations will thus be hurt.

Not only weaker commodity prices, but a series of country-specific factors will add to lower growth in emerging markets and could lead investors to re-estimate growth and return prospects in some countries.

For instance, political uncertainty will be a negative factor in Brazil and Russia and infrastructure shortages will slow growth in South Africa.

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