After nearly a decade of stagnation, global economic growth is finally starting to recover from its post-crisis slump as measured by credit profiles, growth and debt (in some cases).
According to the latest report on the subject from the International Monetary Fund, increasing output in most European nations will boost economic growth across the globe as the region’s economic firepower finally starts to make an impact.
Indeed, according to the IMF's report, Europe’s contribution to the growth of global merchandise imports in 2016-17 was similar to that of China and the US combined -- an enormous benefit to the worldwide economy.
The report forecasts 2.4% expansion across the continent as a whole this year up from 1.7% in 2016. This might not seem like much but considering the severe structural issues the region continues to struggle with growth of 2.4% is an impressive accomplishment.
Last week, National Australia Bank (NAB) economists predicted that GDP set to expand by 3.6% in 2018 and 3.8% in 2019, up from 3.4% in 2017.
Credit Profiles Of Many Countries Are Improving
High growth is masking the structural problems that still plague sovereign nations around the world. According to a recent report from rating agency Moody's, despite growth picking up, many countries are still facing high debt levels and lack fiscal reform.
Unfortunately, the firm believes that few governments will use the pickup in growth to make changes instead the analysts believe "many will focus on addressing short-term vulnerabilities rather than fundamental weaknesses." This will leave those countries with high levels of debt "and lower growth susceptible to weakening credit profiles in the event of a downturn."
That being said, on balance sovereigns' credit profiles improved during 2017. Twice as many sovereigns were upgraded in 2017 (12) as in 2016 (6) while almost half as many sovereigns were downgraded in 2017 (20) as in 2016 (37). Most of the downgrades were concentrated in SubSaharan Africa and the Middle East.
And despite pockets of fiscal weakness, overall Moody's is expecting global debt to remain constant in 2018.
"Globally, aggregate government indebtedness will amount to around 75% of world GDP in 2018, which is largely the same level as in 2017, and still far above the 57% recorded in 2008. While that overall profile represents a profound vulnerability to future recessions or other shocks, the picture is at least a broadly stable one. We expect nearly half of all sovereigns' debt burdens to remain within one percentage point of their 2017 position. And while a slight majority will record higher debt ratios in 2018, there are far fewer sovereigns that are subject to increases of four percentage points of GDP or more."
But even as credit profiles are improving geopolitical tensions and debt buildups in other areas are a possible issue to watch for. As Moody's notes:
The gradual pace of monetary tightening will dampen the risk of financial instability in economies like Australia (Aaa stable),Canada (Aaa stable), Korea, New Zealand (Aaa stable) and Sweden (Aaa stable), which experienced a large build-up in private-sector indebtedness linked to house price increases amid low interest rates. Across Europe, sovereigns will continue to replace high-cost debt issued during the crisis with lower-yielding debt as monetary policy tightens. In the US, rising rates will harm debt affordability but not to levels inconsistent with the current rating, other things being equal. With the notable exception of China, the increase in private sector indebtedness in emerging Asia has, for the most part, been less marked than prior to the Asian Financial Crisis.