Risks to global growth have increased since November and world leaders have little left in their fiscal and monetary arsenals to mitigate the threat, Moody’s has warned.
In its quarterly Global Macro Outlook 2016-17 report released Thursday, the ratings agency said that growth prospects were being hammered by China’s slowdown, a slump in commodity prices and tighter financing conditions in some emerging markets.
This pain would outweigh factors helpful to growth, such as the loose monetary policy in Europe, Japan and the U.S., Moody’s said.
The credit rating firm said gross domestic product growth across the Group of 20 was expected to match the 2.6 percent rate reached in 2015, while only a slight tick up to 2.9 percent was seen for 2017. This average figure for 2016, however, masked the decline in Moody’s forecast range, which dropped 50 basis points at both the top and bottom end to sit at 2-3 percent.
Central banks, meanwhile, have limited room to battle the risks looming over growth, the report said.
“Where government budgets are hit by lower commodity prices and depreciating currencies fuel inflation, room to mitigate the downside risks is limited,” according to the report. “In Europe and Japan, elevated government debt continues to constrain fiscal policy while the efficacy of multiple rounds of quantitative easing is already being tested.”
The European Central Bank has set its key interest rates in negative territory for some time, and the Bank of Japan joined the club on January 29, which was read as a sign that the chance of Prime Minister Shinzo Abe’s “three-arrowed” programsuccessfully stimulating the stagnant Japanese economy was running out.
As for the euro zone, the region’s inability to inflate away debt will mean growth continued to be severely hampered by damaging leverage burdens, Moody’s said.
Here’s where the pain will be
Moody’s also cut its gross domestic product (GDP) growth forecasts for Saudi Arabia, Russia, Brazil and South Africa. Lower oil prices and fiscal tightening to contain government debt hit the Saudis and the Russians, while record-low business confidence levels were Brazil’s weakness, Moody’s said.