Moody's Downgrades the Global Economy

A bit late compared to other research groups and agencies that track the global economy, Moody's has added significantly to its reasons for a likely slowdown in the growth of the G20 nations and has said emerging markets are at extreme risk of stumbling. The firm also has increased its opinion that much of the world faces a more economic damage.

In a report called "Update to the Global Macro-Risk Outlook 2012-2013: Euro Area Debt Crisis Continues to Pose the Greatest Risk." Moody's analysts states that:

risks to the global forecast remain to the downside and have risen relative to the risks perceived earlier in the year. The main risks to the global macro outlook stem from (i) a deeper than currently expected recession in the euro area, for example caused by deeper credit contraction; (ii) the risk of a hard landing in major emerging market economies, including China, India and Brazil; (iii) an oil-price supply-side shock resulting from resurfacing geopolitical risks; and (iv) the risk of sudden and sharp fiscal tightening in the US in 2013, given recent political gridlock.

Many of these problems are already in advanced stages. Appropriately, the firm has cut its GDP forecasts:

Moody's says that only a modest recovery is likely in the G-20 advanced economies. The rating agency maintains its forecasts for relatively robust growth in the US, whilst the euro area as a whole will very likely experience a mild recession in 2012. For the G-20 economies overall, Moody's expects real growth of around 2.8% in 2012 and 3.4% in 2013, compared to the 3.2% growth in 2011 and 4.6% in 2010.

The greatest worry about the economic problems in emerging nations is for the prospects of China, India and Brazil. Moody's cut the growth rate among emerging markets as a whole from 5.2% for the balance of 2012 from an April estimate of 5.8%. For 2013, the rate was chopped from 6% to 5.7%.

The list of risks to the global economy contains several factors that are beyond the worrying stage. Europe's "contraction" is well along as a severe recession, at least among many of its financially weakest nations. Political gridlock is already part of the American political process and likely will be into next year. The U.S. fiscal cliff problem has slowed the investment of businesses and may well undermine consumer spending over the critical holiday season. Some of the shocks to oil prices are severe enough that G7 finance ministers have called on the largest oil-producing nations to increase exports right away.

The Moody's road map is for a set of negative circumstances that are already well advanced.

Douglas A. McIntyre

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