Europe and China greatest threats to global growth — S&P's Sheard
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Europe and China greatest threats to global growth — S&P's Sheard

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The world remains a divided realm, the chief economist of ratings agency Standard & Poor’s warned, with some countries rising and growing, and others facing years of steady decline

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The world remains a divided realm, the chief economist of ratings agency Standard & Poor’s warned, with some countries rising and growing, and others facing years of steady decline.

Asked by GlobalMarkets to highlight the greatest threats to global growth rates in the years ahead, Paul Sheard picked out Europe and China, adding a secondary concern in the form of Britain’s impact on regional and global growth, following the UK’s majority decision on June 23 to leave the European Union.

China remained “a big potential risk factor” to global growth, Sheard warned, noting that how the world’s second largest economy managed the transition from a producing to a consuming market was “full of uncertainty”, and likely to impact everything from growth to inflation to commodity prices for years to come.

He pointed to China’s massive debt overhang: net debt stood at $25tr, or 237% of GDP, at the end of the first half of the year, with corporate debt at 170% of economic output. “These metrics look worrying,” Sheard said. “The question is whether policymakers have the resources and the policy capacity to work through these problems [and find] solutions to them. China has been good at scanning the world and figuring solutions in the past.”

He added: “Given that China has for years been the biggest single contributor to global growth, things could go very wrong if this particular problem is mishandled. A big shock in China, whether stemming from a sharp fall in growth or a sharp rise in the level of non-performing loans at domestic state banks, would move the needle sharply on growth.”

US STRUGGLING FOR TRACTION

The third negative factor weighing on the global economic outlook, he added, was the United States, which, while superficially healthy, was still struggling for traction.

“America is facing a slew of challenges in the months ahead,” Sheard said. “They are facing an unusual election” between a largely pro-international trade candidate, and another who appears to have a more protectionist mien. “There is clearly an unusual lack of predictability surrounding the United States’ future trade policies. If America emerged from the election with a more protectionist attitude, that would clearly be bad for the global economy.”

There were a few bright spots, he added, most notably India, whose economy is set to grow by between 7% and 8% this year and next, according to projections from the IMF. “India doesn’t get talked about that much, but they have had a good monsoon this year, growth is in the high single digits, and they have a capable and pro-business premier — with Narendra Modi continuing to push through reforms such as the recent national sales tax, the GST, and a capable government. They have long been in the shadow of China, and they are much earlier in economic process [than their East Asia sovereign peer] but they have more runway to play with, and they have a very demand oriented economy.” 

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