Business Confidence Is Picking Up, Despite Political Risk
Global trade credit insurer Coface released its quarterly economic update for country and sector risk. The main surprise of early 2017 is the rise in business confidence, leading Coface to positively adjust its global growth forecast to +2.8 percent.
Countries upgraded were Czech Republic (A2), Israel (A2), and Latvia (A3). Mozambique was downgraded to the highest risk level (E).
Looking at sectors, the risk level has improved in metals in Asia and Latin America. The construction sector in Latin America and Western Europe was upgraded, while the retail sector in the UK was downgraded.
Global Outlook: Slight Acceleration in GDP Growth, Trade and the Price of Oil
Business confidence and the financial markets are up despite persistently high political risks in the United States and Europe. Households and companies are starting to spend. The risk of deflation in the advanced economies and in China has decreased, and most of the Eurozone is seeing highly favorable financing conditions.
The upturn in business confidence in the advanced economies, along with an economic recovery in the emerging countries, particularly in Russia (+1 percent) and Brazil (+0.4 percent) have led Coface to upgrade the global growth forecast to +2.8 percent and the global trade forecast to +2.4 percent, compared to +1 percent in 2016.
Tentative Improvements at the Country Level
These signs of improvement are still too tentative to be widely reflected in Coface country and sector assessments. Business activity will remain constrained by high and increasing debt in the emerging economies, along with the threat of protectionist, political, and social risks in the advanced and emerging countries.
The Czech Republic (upgraded to A2) and Latvia (upgraded to A3) are increasingly integrated into the European supply chain, and will continue to display fairly sustained growth this year. The Czech Republic benefits from solid auto sales in the EU. Israel (upgraded to A2) combines solid growth with low levels of unemployment and inflation thus improving the outlook for the sectors selling into the domestic market.
After undergoing an downgrade last June, Mozambique is further downgraded to E, “extreme risk,” on account of serious threats to its political stability and the payment default situation.
Sector Outlook: Good News for Metals and Construction
The metals sector has been the most at-risk sector globally for the last three years, but signs of improvement are showing. The growth in metals production is slowing considerably in China, while prices are increasing, sustained by a renewal in construction and automotive in the US and Western Europe. The imposition of customs tariffs on Chinese steelmaking products has also given respite to steelmakers in Europe and Latin America. As a result, Coface has upgraded the metals sector from “very high risk” to “high risk” in Latin America, driven by Brazil, and in emerging Asia, mainly due to the rise in domestic demand in China.
In Latin America, and Brazil in particular, there is a positive trend in construction thanks to a rapid fall in central bank interest rates, and in energy, despite uncertainties concerning investment projects. The risk for these sectors has improved to “high” level.
In Western Europe, two sectors stand out. Construction in France is now “medium risk,” benefiting from an upturn in housing starts due to low interest rates and tax incentives. The United Kingdom, affected by inflation, is seeing stagnation in household purchasing power, leading Coface to downgrade the UK retail sector to “high.
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