On Second Thought, China Slowdown Will Hit Global-Growth Outlook

Is China in the Midst of a Hard Landing?
  • Moody's reduces 2016 world expansion forecast to 2.8%
  • Citigroup says actual global GDP may be weaker than data show

China’s deepening struggles are starting to make a bigger dent in the global economic outlook.

Moody’s Investors Service on Friday cut its 2016 growth forecast in Group of 20 economies to 2.8 percent, down 0.3 percentage point from the company’s call less than two weeks ago. China is projected to grow 6.3 percent in 2016, down from 6.5 percent previously, the credit-rating company said in a report. Citigroup Inc. last week pared its projection for world growth in 2016 to 3.1 percent from 3.3 percent, the third straight time the bank has cut the forecast.

Recent Chinese data including numbers on credit expansion and fixed-asset investment suggest a sharper slowdown this quarter than Moody’s previously judged, while Citigroup said the worsening outlook was driven by “significant” downgrades for China, the euro area, Japan and several other major countries. Economists in a Bloomberg survey earlier this month gave a median estimate of 3.5 percent global growth in 2016, compared with 3.6 percent in the July survey.

“We’re seeing evidence that the slowdown is broader than expected” in China, said Marie Diron, a London-based senior vice president at Moody’s and one of the report’s authors. “It’s long been clear that there’s a slowdown in the manufacturing and construction sector, but the service sector was more resilient. That’s still the case, but we’re seeing some signs of weakness in the labor market.”

Efforts to boost growth by the People’s Bank of China, which eased its main policy rate this week, will only partly offset the slowdown, Moody’s said in the research report. Moody’s said it cut its global projection because of “information that has become available” since the Aug. 18 publication of its previous forecast. In addition to China, Moody’s lowered outlooks for nations including Brazil and Russia.

The depreciation of the yuan will probably be “fairly modest” in coming months, meaning the world’s second-largest economy won’t get much of a boost from a cheaper currency, Mark Schofield, managing director of global strategy for Citigroup Global Markets, wrote in an Aug. 21 report.

China shocked markets on Aug. 11 by devaluing the yuan and aligning its exchange-rate policy more with market forces. The currency is down 2.8 percent against the dollar this month, while the Shanghai Composite Index of stocks has plunged 12 percent.

“We continue to believe that the greatest risks to our growth forecasts remain to the downside,” Schofield wrote. Actual growth is “probably even lower” because of “likely mis-measurement in China’s official data,” he wrote.

Even with the weaker outlook, Moody’s dismissed the impact of China’s stock-market rout, saying it happened after a “long period of price increases” and will have limited effects on consumer spending and financial-industry profit.

Fitch Ratings said in a note Wednesday that while pessimism on China’s short-term outlook is “overdone,” there is still the potential for a “prolonged period of lower growth,” with expansion well below 7 percent.

U.S. growth also rebounded more than estimated in the second quarter, with the world’s biggest economy expanding at a 3.7 percent annual pace, compared with the initial estimate of 2.3 percent.

With exports to China representing less than 1 percent of U.S. output, a Chinese slowdown to even 5 percent annual growth probably won’t have a significant effect on the American economy, said Torsten Slok, chief international economist at Deutsche Bank AG in New York.

“If I look at fundamentals in the U.S., I just don’t see any evidence of a slowdown. I don’t think China has had any significant impact, at least to this point,” Slok said in a phone interview.

Things are looking gloomier elsewhere. Brazil’s economy, Latin America’s largest, contracted 1.9 percent in the second quarter from the previous period, the government reported on Friday. That’s worse than the 1.7 percent median estimate of economists surveyed by Bloomberg. A gauge of 20 emerging-market currencies had dropped for nine straight weeks through last week.

“The basic assumptions about global growth are suffering, and the epicenter is China,” said Jorge Mariscal, emerging-markets chief investment officer at UBS Wealth Management, which oversees $1 trillion in assets. “China has given us a lot to think about, both in terms of the trend of economic activity, but perhaps more importantly, confidence in the ability of policy makers to react.”

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