Low crude prices are hurting oil exporting nations, but the savings to oil consuming countries are helping to offset weak economic conditions around the world, according to the credit rating agency Moody’s Investor Service.
The decline in oil prices and slower growth in China signal continued economic weakness in many regions of the world, but not an impending recession, Moody’s Investor Service said Tuesday.
Low oil prices have put pressure on many drilling and production companies and raised investor concerns of loan defaults in the oil patch that could trigger a financial shock, although most analysts believe there is insufficient exposure to bad loans to cause such a scenario from taking place.
Moody’s said the positive impact of lower commodity prices on global growth will mitigate the negative effects from financial market turbulence. There has been a broad decline in global stock prices across many sectors, as well as a surge in high-yield corporate bond spreads, since the beginning of the year.
Moody’s forecast growth in G-20 advanced countries to be in the 1.8 percent range this year and 2 percent for 2017. It said lower oil prices have transferred wealth to consumers and businesses, offsetting weaker confidence caused by financial market volatility. Real economic indicators for advanced economies, such as strong employment growth in the United States, suggest modest, sustained growth in the near future.
For emerging markets overall, the combination of lower commodity prices, continued capital outflows, spillovers from slower Chinese growth, and country-specific domestic structural challenges have pushed down economic growth forecasts. For over 40 percent of emerging markets globally growth forecasts are now lower compared to four months ago. Moody’s now expects G-20 emerging markets growth of around 3.8 percent in 2016 (GDP-weighted average), below the 4.0 percent of 2015 and the 5.0 percent growth of 2014. It expects growth to accelerate to 4.5 percent in 2017.
“Risks to global growth have increased, but despite the recent market volatility, we don’t believe that the world’s advanced economies will enter into recession,” said Elena Duggar, a senior vice president at Moody’s. “For example, over the last 30 years, we have seen 16 quarters with a similar or larger fall in the stock market and 25 quarters with similar or larger widening in the average corporate 10-year bond spread — in most cases this volatility did not lead to a recession.”
Moody’s said the current macro-credit environment is similar to conditions in 1987 or 1998 when credit problems within certain sectors of the global economy were very severe, but the rest of the global economy experienced only a modest slowdown in economic activity.
The ratings agency said it expects oil and natural gas prices to remain close to current lows for several years, as excess supply in the market is slowly absorbed. Prices could remain flat or even decrease if too much Iranian production comes on line without supply cuts elsewhere, now that the international economic embargo has been lifted.
Fuel is a major expense for freight transportation providers and their customers.
Moody’s forecasts sluggish global growth, but no recession
