Coface upbeat despite political uncertainties weighing on trade

The rise of populism in Europe, uncertainties around Brexit and US President Donald Trump’s protectionist policies are some of the main threats to the global economy in 2017, according to credit insurer Coface. However, the firm predicts improved global growth in 2017 and, for the first time since mid-2015, has awarded more country risk upgrades than downgrades.

In a global risk report released this week, Coface goes on to warn that the business environment is likely to be affected by a continuing economic slowdown in China, where growing levels of corporate debt remain a serious concern.

For the first time since mid-2015, Coface has upgraded more country risk assessments than it has downgraded. A total of 11 economies, including Spain and Argentina, were upgraded, with only four downgraded – Mexico and South Africa being the largest.

Coface also estimates that the global economy will expand by 2.7% in 2017, a touch better than the 2.5% in 2016. Growth will be driven by emerging economies, which should expand by an average of 4.1% compared to 3.7% last year, as Brazil and Russia get out of their long depressions to compensate for the Chinese slowdown.

Advanced economies should post an average 1.6% GDP growth this year, a similar level to 2016. Coface expects eurozone economies to show resilience. It also believes the UK will struggle due to uncertainties generated by Brexit.

In the meantime, investments levels in the UK will likely fall due to the lack of certainty and bankruptcies are set to rise by 8% in 2017, predicts Coface. It believes the pharmaceutical and auto sectors will be among those most affected by the UK’s withdrawal from the EU.

The company also anticipates that the EU will adopt a hard line in its negotiations with the UK government, to prevent more countries from leaving the bloc. This prospect has become a real concern, with elections looming in Germany, France and the Netherlands. In all of those three key countries, anti-European movements have gained traction since the Brexit vote. For instance, in France, Marine Le Pen – leader of the Front National far-right party – is currently leading opinion polls for the presidential election in April.

Italy’s fragile government, meanwhile, may not survive and the far-left eurosceptic Five Star Movement could make gains if new elections take place, adds Coface.

The policies of President Trump in the US could have a broader impact on the global economy, Coface warns, and trade in particular. The credit insurer describes the trading environment as “at an historically low point”.

Mr Trump has announced a number of protectionist policies since he took over from Barack Obama, including the withdrawal of the US from the Trans-Pacific Partnership trade deal.

The credit insurer notes that close neighbours such as Mexico, Honduras and El Salvador will be most directly affected by US protectionist policies. Asian trading economies like Vietnam and Thailand could also be hit, it adds.

Coface is less enthusiastic than many in the capital markets about Mr Trump’s expected expansionary policies. At best, they will provide a modest boost to the US economy, which should stabilise at a GDP growth rate of 1.8% by next year, it predicts.

The report goes on to forecast lower levels of activity than in 2016 for US industries such as construction and auto, as well as a 1% increase in bankruptcies of US firms. Last year, bankruptcies fell by 3% in the country.

Coface is concerned about China, where high levels of corporate debt have rung alarm bells. The insurer sees little sign of the Chinese government reversing its policy of pumping money into its economy to contain the current slowdown.

“As the Chinese government is not yet ready to trim its level of support for the economy, it would seem that reducing the country’s imbalances is not a priority,” the Coface report points out. The insurer expects China’s GDP to grow 6.3% this year, compared to 6.9% and 6.7% in 2015 and 2016, respectively.