Moody’s upgrades China’s economic growth outlook after stimulus

A Chinese steel worker helps load steel rods onto a large truck for transport at a plant in Tangshan, Hebei province, Chin
Kevin Frayer | Getty Images

Rating agency Moody's Investors Service raised its forecasts for China's economic growth in the wake of "significant" fiscal and monetary stimulus policies.

The ratings agency raised its economic growth forecasts for the mainland to 6.6 percent for 2016 from 6.3 percent previously and to 6.3 percent in 2017, up from 6.1 percent.

"The slowdown and rebalancing of China's economy is likely to be gradual," said Madhavi Bokil, a senior analyst at Moody's, in a statement. "Thus we do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and in 2017."

China's economy has been slowing, posting its slowest growth rate in 25 years in 2015, and a slew of readings released earlier this month came in slightly below expectations.

Economists were particularly concerned after fixed asset investment missed expectations, rising 8.1 percent in the January-July period, compared with a Reuters poll forecast for 8.8 percent. That was the slowest pace of growth since 1999, according to Reuters.

Analysts expected that the implications for long-term growth would likely spur further stimulus, particularly from the fiscal side amid concerns additional monetary easing may overheat the property sector. The country's central bank, the People's Bank of China (PBOC), has already run through several rounds of easing, including lowering banks' reserve requirement ratios and cutting interest rates.

Moody's also raised its economic growth forecasts for Japan.

The ratings agency expected Japan's economy to grow 0.7 percent and 0.9 percent in 2016 and 2017 respectively, up from its previous estimate of 0.4 percent for both years.

It also cited authorities' stimulus efforts for the change, as well as expectations of further monetary easing from the Bank of Japan.

Japan's efforts to kick start its long-moribund economy have stumbled. Data released on Monday showed that the economy failed to grow from the previous quarter, missing forecasts for 0.2 percent growth. Exports in July tumbled 14 percent on-year while imports collapsed 24.7 percent, data showed Thursday.

Earlier this month, the government announced a stimulus package worth $278 billion in hopes of increasing gross domestic product (GDP) growth by 1.3 percent, Reuters said. Analysts also have expected that the BOJ would introduce further monetary easing although at its July meeting, the central bank disappointed markets.

It said it would only increase its exchange traded fund (ETF) purchases so that their amount outstanding on its balance sheet would rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously. Analysts had expected that the BOJ might cut interest rates further into negative territory or increase its purchases of Japanese government bonds, or both.

A better outlook for China would likely help to stabilize the outlook for emerging market economies as well, Moody's added in a press release on Thursday.

It also noted that a modest recovery in commodity prices and better capital flows would help keep emerging markets on an even keel.

Moody's upgraded its growth forecast for G20 emerging markets by 0.2 percentage point each to 4.4 percent for 2016 and 5.0 percent for 2017, mainly on Russia's and Brazil's economies contracting at a slower pace and higher China growth expectations.

But Moody's noted that emerging markets have previously experienced "sharp reversals" in capital flows when the U.S. Federal Reserve has tightened policy, such as in 2013 when the central bank first broached the idea that it would taper its quantitative easing program.

"Financial market turbulence could easily return when the U.S. rate increase cycle resumes or political risks crystallize," Elena Duggar, an associate managing director at Moody's, added in the statement.

The report said, "their ability to weather external headwinds during the early phase of the Federal Reserve's interest rate tightening cycle in 2017 is material to the assessment of their economic outlooks."

Among advanced economies, Moody's lowered its GDP growth estimate for the U.S. to 1.7 percent for 2016 from 2.0 percent previously, on the release of lower second-quarter preliminary data. It kept its 2017 U.S. growth forecast at 2.3 percent.

Moody's said it had already revised its forecasts for the U.K. and the euro area in the wake of Britain's vote to exit the European Union in late June. It expected the U.K. economy would grow 1.5 percent in 2016 and 1.2 percent in 2017.

While it expected Brexit spillovers to the euro area would be limited, it anticipated deterioration in some euro-area countries, keeping its forecast for the region to 1.5 percent and 1.3 percent for 2016 and 2017 respectively.

Moody's cited a number of risks to the global economic outlook, including a rise in nationalist and protectionist pressures.

"The most immediate risk in this context is an outcome in the upcoming US presidential elections that ushers in an administration that would renegotiate global trade pacts and security alliances. We believe that such a development would harm confidence and global growth," it said.

"In Europe, with a busy election calendar over the coming two years, we see a potential risk that the European Union fragments further, with global consequences," it said.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1