U.S., China, Canada See Downgrades from Credit Insurer

The global economy is on the skids, hampered by anemic growth and unusually low price inflation. This has left the outlook for the United States and China, particularly, the worse for wear, according to credit insurer Coface.

In its second quarter country risk report released Thursday, Coface downgraded China’s rating to B from A4, and the rating for the U.S. to A2 from A1. The firm’s global growth forecast for this year is about 2.5% and less than 3% next year. In addition, the world’s central bank systems are now not foreshadowing any tightening or rate hikes in the near future. As a result, corporate risks are rising around the world and reaching a peak not seen since the early 2000s.

However, these conditions are negatively impacting China and the U.S. in different ways, according to Coface.

In China, fiscal stimulus helped stabilize growth somewhat in the first quarter, though overcapacity in corporate sectors like steel and cement is worsening credit risks as more and more financing goes to refinancing existing credit lines instead of being plowed back into investment. Some 14% of loans taken out by Chinese companies are considered risky, while non-performing corporate loans grew 42% in the first quarter, year-over-year. Moreover, this expansionary policy is not sustainable, and a quick rise in the defaults on local corporate bonds and a reduction in allocated loans exhibit signs of a slowdown, Coface said.

In the U.S., expected growth of 1.8% this year and 1.5% next year is already hitting companies as insolvencies rose 0.3% in the first quarter for the first time in six years. Earnings tumbled 6% year-over-year in the first quarter, the credit insurer said. Reduced hiring levels are also affecting the economy as the energy sector struggles because of lower commodities prices. Employment in the construction sector is also fizzling.

“In the United States, hidden behind the continuous fall in the unemployment rate, there are companies whose profitability is being eroded and which are investing less,” the report notes.

Among other ratings changes, Coface downgraded Canada’s rating from A2 to A3. Falling oil prices had led to January’s downgrade from A1 to A2 and continue to pose a downside risk to the country. Also impacting the downgrade is a potential property market correction that would deter residential investment and household consumption, Coface said.

- Nicholas Stern, editorial associate

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