Moody's: Global growth to remain muted as China's slowdown weighs on emerging markets

Weak growth in emerging markets, driven by low commodity prices and waning export demand, will continue to act as a drag on the global economy this year, says Moody's Investors Service.

Moody's has lowered its 2016 growth forecasts for Argentina, Brazil, Mexico and Turkey, as the effects of the weaker external demand and lower commodity prices have compounded domestic structural and political challenges. We currently forecast G20 emerging markets growth at 4.2% for 2016 compared to 4.4% in 2015. For G20 advanced markets growth is forecast at 1.7% for 2016 compared to 1.9% in 2015.

"The global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades," said Elena Duggar, an Associate Managing Director at Moody's. "Global trade remains subdued, while spillovers from emerging markets shocks to financial markets globally have increased substantially."

 

A more pronounced slowdown in China's economy than anticipated is currently one of the biggest risks to the global economy. Slower growth in China, the world's second-biggest economy, could have a significant knock-on effect on global growth by increasing risk aversion, ramping up financial market stress, and souring sentiment.

China's economy will slow gradually from 6.9% in 2015 to around 6.3% in 2016, guided by policies intended to bolster growth, according to the report.

"The fears of a Chinese hard landing have eased in recent months with data suggesting the economy is stabilizing," said Madhavi Bokil, a Vice President and Senior Analyst at Moody's. "However, the government's focus on achieving specific growth targets, could come at a cost to the quality of growth."

China's growth continues to be supported by increased borrowing, which ultimately will increase longer-term risks, particularly within the banking system.

In India, growth will pick up slightly, climbing to 7.5% in 2016 and 2017, from 7.3% in 2015. India, as a net importer of commodities, has benefited from falling prices and growth will be driven by rising consumption. However, a sustained improvement in domestic private investment would be required for the growth momentum to be sustained.

Moody's expects that the Federal Reserve will raise its benchmark interest rate at most twice this year. Policy makers will raise rates gradually, giving investors ample forward guidance as they seek to minimize the negative impact that higher borrowing costs will have on growth and the potential disruption they could cause to global capital markets.

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