Moody’s Expects Global Growth Improvement as Protectionist Risks Fade for Now

While some of the largest risks to advanced economies have waned and emerging markets continue to expand, Moody’s Investors Service sees an improved outlook for global growth this year.
G20 economies should grow at a 3.1% annual rate in 2017 and 2018, compared with 2.6% growth in 2016, Moody’s analysts said. Meanwhile, the potential threat posed from protectionist policies in the U.S. appears to have eased at present.

"Overall, global growth is looking increasingly sustainable with economic data surprising to the upside in a number of emerging market countries," said Madhavi Bokil, a vice president and senior analyst at Moody's. "The current momentum should continue, barring any negative surprises."

In China, Moody’s expects growth to continue to slow this year—at a rate of about 6.6%—thanks to reduced property-related investment connected to central bank liquidity tightening, including limits on home mortgage lending. "We continue to believe that the near-term risk of disorderly deceleration of growth in China is limited," said Elena Duggar, an associate managing director at Moody's.
"Government policy will target limiting the growth of leverage, rather than bring about a rapid deleveraging that could be potentially destabilizing."

Prospects for India are bright—growth of 7.2% this year and 7.7% in 2018—as the government recovers from the impact of last year’s demonetization efforts and continues to push through reforms that will help “…reduce inefficiencies and improve trend growth in the long run,” Moody’s analysts said.

Global growth is still hampered, however, by “…changing demographics, muted investment, low productivity growth and stagnant wages,” the ratings firm said.

– Nicholas Stern, senior editor

May Credit Managers’ Index Could Note Cooling of Business Optimism

Business exuberance has faded a bit in May, reigniting concerns surrounding commercial credit factors, such as a slip in dollar collections from March, according to preliminary data in the latest NACM Credit Manager’s Index (CMI), which will be released Wednesday morning at May’s CMI results showed a drop, leaving unclear how long business and consumer patience will hold out for rapid improvements in the business environment resulting from potential tax reform, infrastructure build and deregulation. “The wild enthusiasm that was noted at the start of the year has faded as reality sets in,” said NACM Economist Chris Kuehl, Ph.D.

Expect the May CMI to show more movement in the unfavorable factors categories, as some companies’ struggles with slow payers and dollar collections in the manufacturing sector in particular are anticipated to be reflected in the data.

“The big growth opportunities have not materialized as yet, but there remains some hope they will,” Kuehl said. “The other measures of the economy have been showing some of this angst as well, as the Purchasing Managers’ Index has been down from previous heights and the latest durable goods numbers were a little off their recent peak.”

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the May 2017 report on Wednesday morning by clicking here. CMI archives may also be viewed on NACM’s website.

Expect Bank Deregulation to Take Place in Small Pieces of Legislation

As lawmakers begin to make moves on promised bank deregulation, Fitch Ratings is of the opinion that this will more likely take the form of many small bills targeting specific segments of the financial sector instead of an overarching piece of legislation.

“Broad and deep deregulation is generally viewed by Fitch as likely to have a negative impact from a bank credit risk perspective; however, the ultimate form of regulatory change and its application by individual banks will determine the ratings implication,” wrote Fitch analysts in a new report.

For instance, if the Volcker Rule is repealed, it’s still unlikely that banks will return to full-scale proprietary trading, yet it may lead to negative ratings implications that depend on banks’ response, Fitch analysts said. If the Orderly Liquidation Authority (OLA)—the Title II provision of the Dodd-Frank legislation that gives the Federal Deposit Insurance Corporation (FDIC) powers to carry out quick liquidations of large, complex financial companies—is taken away, it could open up the banking sector to “…significant systemic risk in the event of a crisis, though resolution planning could be a mitigating factor to large bank failures,” Fitch said.

Meanwhile, replacing the Consumer Financial Protection Bureau (CFPB) is not expected to directly affect most banks’ and nonfinancial institutions’ credit profiles, “…though they could reduce the regulatory burden and associated costs,” analysts said.

– Nicholas Stern, senior editor

Moody’s Downgrades China’s Rating

With the expectation that economy-wide debt will continue to rise and potential growth will slow, credit ratings agency Moody’s Investors Service downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3. The country’s outlook has been changed from negative to stable. This marks China’s first downgrade from Moody’s since 1989.

Though Moody’s expects that reforms will likely improve the economy and financial system given time, the financial strength of the country will deteriorate in coming years. Reforms are not likely to prevent a rise in economy-wide debt nor help with increasing government liabilities. Risks are balanced, however, at the A1 rating level, and as reforms take hold, the deterioration in China’s credit profile will be contained, Moody’s said.

Explaining the decision, Moody’s said that China’s GDP will remain very large and growth will stay high, but potential growth will likely decrease in coming years. Given the importance Chinese authorities place on growth, the economy may become increasingly reliant on policy stimulus. GDP growth has declined in recent years from a high of 10.6% in 2010 to 6.7% in 2016, a slowdown from structural adjustment that Moody’s expects to continue. Further, the ratings agency forecasts that economy-wide debt of the government, households and nonfinancial corporates will continue to rise.

China’s Ministry of Finance criticized Moody’s decision, saying that it was based on "inappropriate methodology" and has somewhat exaggerated the difficulties the Chinese economy is facing, China Daily reported.

The downgrade comes on the heels of a bilateral trade agreement between the U.S. and China that was revealed on May 12, part of which allowed foreign-owned financial groups to offer credit ratings services by July 16, the Financial Times reported.  Investors believe that the introduction of credit rating services will help attract foreign investment into China’s onshore bond market. Fitch Ratings said that it was encouraged by the news and looked forward to more details, and Moody’s and Standard and Poor’s made similar statements, the Financial Times said.

Moody’s also downgraded the ratings of 26 Chinese nonfinancial corporate and infrastructure government-related issuers and rated subsidiaries, as well as a number of banks.

– Adam Fusco, associate editor

Eastern European Companies Prefer Noncredit Sales

Overdue business-to-business (B2B) invoices in Eastern Europe are on the decline, while sales on credit terms rose slightly. Despite this, nearly 60% of companies prefer not to use credit on B2B sales. Payment default risk is also expected to worsen in the region, according to a survey from Atradius.

Overdue B2B invoices increased roughly 5% in 2016, but a more than 1% drop this year brought it to 41.5%. Nearly nine out of 10 responses reported late payments from domestic B2B customers. Foreign customers’ late payments decreased slightly but still impacted about eight in 10 responses. The Czech Republic was most likely to experience late payments while Hungary was the least likely. Turkey was the most affected and saw days sales outstanding (DSO) numbers at an average of 73 days. The regional average DSO was 61 days.

As far as sales on credit terms, the average percent of B2B sales to domestic customers is higher than that of foreign customers. This has been seen before in previous surveys. Poland had the lowest average percent of credit sales at just below 30%. Hungary had the most sales on credit terms with about two out of every three transactions. Roughly 40% of Eastern European companies sold on credit terms, which was just ahead of Western Europe.

Payment terms also increased from 2016 to 2017 in Eastern Europe. Of the countries surveyed, respondents averaged 35 days this year compared to 31 last year. Turkey had the largest increase to 47 days, and it had the longest invoice-to-cash turnaround at 42 days.

Liquidity and insufficient funds were the issues most often cited for payment delays. Complexity of payment procedures was also a reason for B2B payment concerns. “According to responses across the countries surveyed, 45% of the average total value of domestic B2B invoices remained unpaid after the due date,” said Atradius analysts.

“Against this backdrop, a strong focus on the management of trade credit risk is essential to maintaining the financial viability of a business,” said Andreas Tesch, Atradius chief market officer, in a news release. The Atradius Payment Practices Barometer survey included more than 1,000 companies from the Czech Republic, Hungary, Poland, Slovakia and Turkey.

– Michael Miller, editorial associate

Eurozone Growth Maintains Six-Year High

Economic growth in the eurozone, already at a six-year high, held steady in May, while job creation rose to one of its strongest recorded levels, according to the latest IHS Markit Flash Eurozone Purchasing Managers’ Index (PMI). Business optimism about the coming year is at one of the highest levels in the five-year history of the survey’s future output question.

“The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic if the PMI holds its elevated level in June,” said IHS Markit Chief Business Economist Chris Williamson. “Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years.”

With output growth accelerating to the fastest in over six years, manufacturing has led the upturn, with service sector business activity also remaining strong. A boost for manufacturing came from exports rising at the steepest rate since April 2011. To expand operating capacity, hiring has been heavy, at a pace rarely before seen, IHS Markit said. Manufacturing added jobs at the steepest rate in the survey’s 20-year history. The overall rise in employment was the second-largest in nearly 10 years.

Strong price pressures have dogged the upturn, with average selling prices for goods and services rising at the second-fastest rate since July 2011.

“Although selling prices have continued to march higher, there are signs of input cost pressures beginning to ease,” Williamson said. “This suggests underlying inflationary forces could moderate as we move into the second half of the year, playing into the ECB’s [European Central Bank] hands. Although the pace of economic growth signaled by the PMI is historically consistent with the ECB taking a hawkish stance, the dip in cost pressures will add weight to arguments that there’s no rush to taper policy.”

– Adam Fusco, associate editor

Foreign Currency Shortages Continue to Hit Oil Exporters in Sub-Saharan Africa

Even though oil prices have stabilized recently, oil exporters in Sub-Saharan Africa will continue to have a difficult time managing foreign currency shortages racked up in recent years.

"Falling oil and commodity prices over the past two years have led to foreign currency shortages in numerous Sub-Saharan African countries, with oil exporters hit particularly hard," said Lucie Villa, a Moody's vice president, senior analyst and co-author of a recent report. "The stabilization in oil and commodity prices over recent months will help to ease the pressure, but any recovery will depend on continued higher prices and could take some time."

In Angola and Nigeria during the past six months or so, governments have tried to shore up the fall in foreign exchange reserves by rationing dollars, devaluing currencies and borrowing in foreign currencies, Moody’s said. “But this has been to the detriment of the non-oil economy, price stability and government balance sheets,” analysts with the ratings agency said.

The Republic of Congo and Gabon peg local currency to the euro and foreign exchange reserves have collapsed, with reserves expected to fall more this year, Moody’s said.

Nonfinancial companies operating in oil exporting countries like Nigeria and Angola have seen the most impact from local currency weakness, and analysts expect these problems to continue this year but ease in 2018. "Dollar shortages make it difficult to pay suppliers of imported goods and equipment, meet dollar debt payments or to repatriate funds outside of the respective countries," said Dion Bate, a Moody's vice president. "The associated local currency weakness increases the cost of servicing unhedged foreign currency debt obligations, reduces repatriated profits in foreign currency and lowers operating margins, as companies are not able to pass on high import costs to the consumer."

Banks in Angola, Nigeria and the Democratic Republic of the Congo have been the most affected by foreign currency shortages because of their economies’ reliance on dollars, as they’ve seen foreign currency deposits deplete with limited access to new foreign funding. "The resultant currency devaluations have also eroded banks' loan quality, profitability and capital," said Constantinos Kypreos, a Moody's senior vice president.

Higher oil prices and associated revenues are relieving pressures in Nigeria and Angola central banks, which are injecting more dollars into the economy, Moody’s said. Regardless, banks in Sub-Saharan Africa typically keep high capital buffers and enjoy robust profitability.

– Nicholas Stern, senior editor

Conference Board Index Continues Solid Showing

There may be growing doubts as to the staying power of the current economic recovery in some circles, but the data that has come from the Conference Board of late has been very solid. For the fourth straight month, there was an improvement in this data. Now the index is sitting at 126.9, 0.3% higher than it was the month before.

The index is one of the more comprehensive looks at the U.S. economy as it is essentially an index of indices with 10 components added together to paint a whole picture. There is an examination of factors such as initial claims for jobless benefits to track whether companies are hiring or firing, factory orders to get a feel for the demand that is presenting itself from the consumer, the performance of the S&P 500 to gauge what is happening in the markets and so on.

The other seven indicators include the average number of hours worked in manufacturing, manufacturer’s new orders in consumer goods and materials, the ISM index reading of new orders, nondefense capital goods orders, building permits for new private housing units, the Leading Credit Index, the interest rate spread between 10-year Treasury bonds and federal funds rate and the measure of consumer expectations for business conditions. There were reported improvements as far as the lagging indicators and the coincident index as well.

The assertion at the start of the year was that the economic growth we have seen was being driven by expectations. That has been true to some degree as there have been plenty of surveys and polls suggesting that the enthusiasm demonstrated by the business community and the consumer was rooted in the belief that a new regime would sweep through and accomplish everything from tax reform to deregulation to revamping health care and reworking trade. It soon became apparent that none of these moves would be simple or swift. That was expected to drag on people’s confidence. It may have to a degree, but there have been other factors that have helped people stay upbeat.

The economy relies on the consumer for some 80% of its growth. For several reasons, the consumer is in a good mood and has started to extend that mood to action. For a few months at the start of the year, the surveys were not really matching up well with reality. Consumers said they were confident, but retail sales lagged. Now those retail numbers are up. Revisions to the old data show that there was more activity in the retail sector than had been noted before. There is even evidence that older Millennials are starting to emulate their elders as they begin their families and buy homes and all the other things that having children demand.

-Chris Kuehl, Ph.D., NACM Economist

Risk Grows Among Chinese Investment Companies

Chinese investment companies (ICs) have come to the fore internationally, with rapid expansion over the last five years due to loose monetary policy and government support for overseas expansion of local companies. But that rapid growth may not have been matched with corresponding risk management, according to a recent report from Fitch Ratings.

Overseas expansion has become important in the strategies of ICs, which have acquired an advantage in making foreign acquisitions, with targeted businesses tempted by access to the Chinese market and other opportunities afforded by IC portfolios. From 30% to 40% of the total assets of ICs are bound up in overseas investments, Fitch estimates. Foreign acquisitions have even become necessary for portfolio diversification, but such expansion is also in accord with the government’s “going out” policy that encourages companies to invest and operate abroad.

The government has recently sought to curb capital outflows and check foreign direct investment, but ICs keep foreign currency offshore and have expanded access to offshore capital markets, which can help in foreign acquisitions without increasing capital outflows, the ratings agency said.

Concern lies in the fact that the ICs’ strategies and risk controls have not been tested by market volatility or an economic downturn. These companies also have less-sophisticated tools for reporting risk compared to more developed countries. The fact that ICs have been able to meet performance targets is attributed by Fitch to favorable market conditions. A reliance on divestment proceeds and bank loans to meet cash outflows creates the risk that ICs could be pushed into a “fire sale” environment if there is stress in liquidity, Fitch said.

Chinese IC assets enjoyed a compound annual growth rate of 67% in five years to the end of 2016, reaching a value of $1.5 trillion. Fitch expects assets to rise by more than 25% each year over the next five years.

– Adam Fusco, associate editor

U.K. Insolvencies Expected to Drop this Year, but Underlying Conditions Still Cloudy

Insolvencies in the U.K. are expected to decline by 7% this year, but a new report from credit insurer Atradius suggests the drop is not due to any underlying economic resilience but a statistical adjustment from the high rate of insolvencies in personal service companies (PSCs) in 2016.

In 2016, the U.K. Insolvency Service noted a 15% year-over-year increase in compulsory liquidations and creditors’ voluntary liquidations in England, while cases in Wales grew to 14,810, Atradius analysts said. The bulk of this increase was due to changes to claimable expenses rules that led to the liquidation of almost 1,800 PSCs in the fourth quarter of 2016. Without these PSC liquidations, the insolvency rate dropped to 1% year-over-year.

This year, the overall insolvency rate is thus expected to drop by 7% as these types of liquidations become less prevalent, Atradius said. However, business insolvencies in industries like retail are expected to increase due to the uncertainty surrounding Brexit. Retail sales, year-over-year, are expected to decrease to 1.2% growth in 2017, compared to 2.6% in 2016. Overall GDP growth is also expected to fall to 1.6% this year, compared to 2.0% in 2016.

Meanwhile, an April small- and medium-size enterprise (SME) Risk Index from Zurich found 52% of Britain’s SMEs are owed an estimated $57.8 billion in late payments. The index, which culled the results of over 1,000 SME owners, found 21% are owed more than $32,000 and almost 10% are owed more than $129,000.

Nearly two-thirds of those who recorded late payments typically saw delays of more than a month on payments already 30 days overdue, while 45% saw payment delays of up to three months, Zurich said. Twenty-four percent of survey respondents said late payments had caused their businesses to overdraft in the past, while 39% said late payments have had a significant impact on cash flow.

– Nicholas Stern, senior editor

Sovereign Credit Risk on the Decline

Though the politics of individual countries may continue to be in flux, sovereign credit risk appears to be on the decline, at least as measured during the week ending May 12.

The European Sovereign Expected Default Frequency (EDF), which measures the expected probability of default over a five-year time period by Moody’s Investors Service, dropped by an average of 2.44% on the heels of the European Commission’s (EC) report that economic growth in the eurozone is expected to expand 1.7% in 2017, a fractional increase from the forecast in February. According to Moody’s, the EC said that the perceived risk to the outlook has lessened due to the defeat of populist parties in France and the Netherlands.

“At the start of the year, the most pronounced threat to the future of the European Union was coming from countries that were once considered stalwarts,” said NACM Economist Chris Kuehl, Ph.D. “The British decision to withdraw was not all that unexpected given the frosty relationship the U.K. has long maintained with the rest of Europe, but the prospect of both the Netherlands and France pulling out had many declaring that the EU was a ‘dead man walking.’ As it turned out, both Geert Wilders and Marine Le Pen fell short and the EU was saved. At least that has been the general assessment from a relieved establishment in western Europe.”

Greece showed the largest improvement in the eurozone, with its Sovereign EDF declining from 3.08% to 2.82%, indicating that investors have some faith in the country’s ability to secure bailout money.

The Asia Pacific region’s Sovereign EDF declined by 0.51%, with South Korea’s decreasing from 0.18% to 0.17% as Moon Jae-in’s swearing in as president may ease political tensions with promises of relieving economic worries, improved relations with North Korea, and more balanced diplomacy with the U.S. and China, Moody’s said.

Latin America recorded the largest weekly drop in default probabilities, with Venezuela, Brazil and Chile marking notable improvements. In the Middle East and Africa region, Saudi Arabia, Nigeria and Turkey contributed to an average rise of 1.19% for the area’s Sovereign EDF.

– Adam Fusco, associate editor

House Builder Confidence Soars in May

Builder confidence in the market for newly-built single-family homes continued to grow in May to the second-highest level since the Great Recession, as tracked by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

The HMI reached a score of 70, up two points from the April HMI reading, NAHB said. “The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” said NAHB Chief Economist Robert Dietz. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

The HMI tracks builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor”; readings over 50 indicate more builders see conditions as good than poor.

Within the components of the HMI, sales expectations over the next six months rose four points to 79, NAHB said. The index gauging current sales expectations climbed two points to 76. The buyer traffic index, on the other hand, fell a point to 51.

Three of the four regions tracked over three-month moving averages in the HMI saw gains. The Midwest remained unchanged.

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, TX.

– Nicholas Stern, senior editor

Retail Sales Inch Up in April after Upward Revision from March

Retail sales inched up modestly but below estimates in April, boosted in part by a strong showing in non-store retailers, while retail sales figures were revised upward for March, according to an analysis of data from the U.S. Department of Commerce by Wells Fargo.

For non-store retailers, sales grew by 1.4% in April, while sales at electronics and appliance stores increased by 1.3%. “Electronics and appliance store sales has been one of the weakest sectors of retail in the past year but has been very strong lately, increasing another 2.2% in February,” Wells analysts said. Motor vehicle sales also reversed weak postings in the first quarter by increasing 0.7% in April.

Housing retail sales were mixed in April, with building materials and garden equipment and supplies dealer sales increasing 1.2% on the back of a 1.7% drop in March. On the other hand, furniture and home furniture store sales dropped 0.5% in April following a 1.5% increase the prior month.

Clothing and clothing accessories store sales dropped 0.5% in April following a bump in March. Also, general merchandise store sales carried on a decline from the prior month. Department store sales were down, year-over-year, by 3.7% in April, though they eked out a 0.2% rise on the month.

Meanwhile, retailers appeared to be stocking up on inventory in March—by 0.2% overall—in anticipation of some growth during the second quarter, Wells said in a separate report. “One of the few advantages brick-and-mortar retailers have over online competitors is having product when the consumer needs it ‘now!’” wrote Tim Quinlan, senior economist, and Sarah House, economist, both with Wells Fargo. “That may be a factor in why retailers are stocking up more than wholesalers and manufacturers.”

– Nicholas Stern, senior editor

Import, Export Prices Continue to Rise

Higher fuel prices and nonfuel prices each contributed to an increase in the price index for U.S. imports in April, according to the U.S. Bureau of Labor Statistics (BLS). Export prices also rose and have not recorded a monthly decline since last August. The last time import prices declined was last November.

U.S. import prices rose 4.1% for the year ended in April, continuing a trend of 12-month increases over 4%, the largest over-the-year advances for the index since February 2012. Petroleum prices saw a rise of 1.6% and natural gas 4% in April. Over the past year, the price index for import fuel has advanced nearly 43% in contrast to about a 32% decline for the previous 12-month period ending April 2016. Between April 2016 and April 2017, petroleum prices rose nearly 44% and natural gas 49%. Rising prices for nonfuel industrial supplies and materials; automotive vehicles; foods, feeds and beverages; and consumer goods offset lower capital goods prices for the year, BLS said.

Higher prices for both agricultural and nonagricultural exports contributed to the overall increase in export prices. Over the past 12 months, U.S. export prices rose 3% following a decline of 5.1% for the year ending April 2016. Among agricultural exports, a nearly 38% jump in vegetable prices this April more than offset falling prices in soybeans, corn and wheat, reflecting the largest monthly advance since the index began in December 1996. The price index for nonagricultural exports increased almost 3% over the past 12 months. In April, higher prices for capital goods and automotive vehicles offset price drops for industrial supplies and materials.

Improved global demand has continued to benefit exporters, with a stable dollar allowing further export price increases, according to a recent Wells Fargo report. An increase in export prices in March reflected the strongest year-over-year rate since 2012, Wells Fargo said.

– Adam Fusco, associate editor

Riskier Infrastructure-Like Transactions Likely to Increase

There will be an increased investment movement in riskier infrastructure-like transactions similar to 2007–08, said a new Fitch Ratings release. Credit professionals need to be on the lookout for such deals in nontraditional infrastructure investments. “Life insurers, fund managers and pension funds are increasing their allocations to infrastructure transactions as they seek out stable returns from real assets,” the report said.

“Non-core infrastructure” transactions are “likely to be fundamentally riskier than traditional infrastructure deals … because the underlying asset may be less essential to the public, may not have the same high barriers to entry and may experience more variable costs,” said Fitch.

Some of these “hybrid infrastructure” transactions include airport services and landing slots. “So far, investors have focused on buying and refinancing existing assets,” the ratings agency said, but “these investors are more aligned with debt investors in looking at the long-term stability of a business and thus keeping leverage within manageable levels.”

Private hospitals and care home businesses 10 years ago were structured in similar ways as the new infrastructure-like transactions. Other assets such as telecom towers were also once considered outsiders, but according to Fitch, some market participants now consider them as “core infrastructure” assets. This could change the current course of infrastructure hybrids and eventually land them in the same “core infrastructure” category.

– Michael Miller, editorial associate

Small Business Optimism Dips Slightly, with Dampened Expectations for an Improving Economy

Small businesses remained relatively optimistic overall about the economy in April, though they expressed some unease in their expectations for improvement in the economy following an unsuccessful attempt to repeal and replace the Affordable Care Act.

The National Federation of Independent Business’ (NFIB) Small Business Optimism Index dipped 0.2% in April to 104.5, dragged down in part by an eight-point fall in improvement expectations. Still, most of the factors tracked in the NFIB index remained on solid footing, including sales trends and increasing employment, according to an analysis of the data by Wells Fargo.

Owners continue to report difficulty in filling skilled or qualified labor, and the percentage of owners who rank the situation as their most important problem is nearing a cycle high not seen since November 2000, Wells Fargo analysts said.

Meanwhile, according to the latest Job Openings and Labor Turnover (JOLTS) survey that was released today, job openings rose a bit in March with 5.7 million openings. Job openings rose by 126,000 positions, while mining and logging lost 8,000 slots following recent gains.

Involuntary separations remain low as employers seem to be trying to hold on to workers in a tight labor market, Wells Fargo said. The so-called quit rate stayed the same at 2.1% in March, where it’s been hovering for the past year. “Although this marks an improvement from earlier in the cycle, wages have disappointingly failed to accelerate thus far in 2017. With a 17-year high share of small businesses reporting jobs are hard to fill, an acceleration in quits would bode well for a pickup in wage growth later this year,” analysts said.

– Nicholas Stern, senior editor

Problems in U.K. Retail to Impact Real Estate-Related Credit Risk

Following the break of the United Kingdom with the European Union, retailers in Britain have been affected by changes in consumer confidence and the increase of sourcing costs due to the depreciation of the pound. The U.K. nonfood retail industry faces profitability challenges, which will impact the use of real estate in the industry, with a subsequent effect on the credit risk of loans secured by it, according to a new report from Moody’s. The secondary retail property sector is set to be particularly exposed to risks, though logistics and prime retail commercial properties are likely in a position to mitigate them.

“Reduced store productivity and profitability for U.K. nonfood retailers can lead to reduced rents and increasing vacancies in properties securing commercial real estate loans and commercial mortgage-backed securities,” said Stephen Hughes, assistant vice president and analyst at Moody’s. “The degree to which these retail challenges will affect real estate landlords and debt differs, however, between prime logistics, prime retail and secondary retail assets.”

The logistics sector has the benefit of higher occupational demand. “Well-located, high-quality logistics properties will continue to attract strong tenant demand, due to steady growth in online retailing,” said Oliver Schmitt, vice president and senior credit officer at Moody’s. London’s premier shopping streets also benefit from high tenant demand, reducing credit risk affecting loans secured by these assets.

With the continued shift from consumers toward online retailing and other factors, rising cost pressure will continue to weigh on secondary retailers, who already suffer from declining sales productivity.

“The effect of rising costs on store profitability is more pronounced in secondary than in prime retail spots in the U.K., where steady or increasing sales productivity is a buffer against cost increases,” Schmitt said.

Retailers also endure higher expenses from rising employee costs and increased property taxes, particularly in London, Moody’s said.

– Adam Fusco, associate editor

Labor Productivity Affects Global Growth

Labor productivity is a cause of concern for the global growth outlook, according to a new report from Moody’s Investors Service. The ratings agency expects global growth to increase to 3.1% this year and 3.5% next year. Global growth was at 2.7% in 2016. This could change if productivity growth does not keep pace.

“Should productivity growth remain at its 2016 pace of 1.2% or even at its average pace of 1.7% over 2011–2015, global growth in 2018 could be as low as 2.5% or 3% respectively, compared to Moody’s current expectation of 3.5%,” the agency said.

There are several reasons behind the slowing rebound rate after the financial crisis, including weak investments due to the availability of credit, business pessimism and economic uncertainty. “Long-term trends such as population aging and the slowing growth in human capital and education are also behind the decline in productivity growth,” Moody’s said.

Meanwhile, the U.S. Bureau of Labor Statistics released the country’s productivity data this week. Labor productivity in the U.S. decreased at a 0.6% annual rate in the first quarter of 2017. Economists polled by Reuters expected no change in productivity. Productivity increased 1.1% between the first quarter of 2016 and that of 2017. “Weak productivity could make it difficult to boost annual economic growth to 4% as President Donald Trump has promised,” said Reuters.

“It should be noted that productivity numbers are always volatile and were likely affected by the seasonal issues that dragged overall GDP growth down for the quarter,” said NACM Economist Chris Kuehl, Ph.D. “The problem is that productivity has been unimpressive for years now and has consistently been under the levels seen in 2011.”

– Michael Miller, editorial associate

Canada Increases Exports to Non-U.S. Countries

Canada is looking to other places besides the United States when it comes to shipping goods abroad. Coal exports to China and South Korea were among the reasons for the new record of goods sent to countries other than the U.S., according to Statistics Canada.

The new record is roughly $9.2 billion, and “exports to countries other than the United States rose 15.3%” in March, the agency said in a news release. Total exports rose 3.8% in March to a record of $34.2 billion. Imports from non-U.S. countries also increased slightly to $12.2 billion. Overall imports increased 1.7%.

The U.S. is still by far the No. 1 trade partner for Canada, yet total exports only increased a tenth of a percent from February to March. Meanwhile, U.S. imports increased 2% in March and by only 4.2% on a year-over-year basis. Other importers such as China, Mexico, the U.K. and Japan had double-digit increases from March 2016 to March 2017.

Forestry products and building and packaging materials exports jumped 5% in March, but that could change following the United States’ recent announcement of adding a tariff to softwood lumber imports into the U.S. Also on Thursday, the U.S. Bureau of Economic Analysis announced a $20 million increase in March lumber imports.

Canada’s trade deficit hit roughly $100 million, while economists polled by Reuters expected a shortfall of about $580 million. Royal Bank of Canada was less favorable, with an expected deficit of nearly $730 million.

– Michael Miller, editorial associate

Global Growth Forging Slowly Ahead, but Variety of Risks Could Upend Stability

A year’s worth of slow but steady growth in the world’s industry sectors as tracked by Moody’s Investors Service has led the ratings agency to view overall outlooks for the sectors in a positive, if “modest and fragile,” light.

Global industry sector outlooks reflect expectations for fundamental business conditions over the coming year to year and a half; at the end of the second quarter 2017, nine sectors’ outlooks were positive, six were negative and 39 were stable.

"The current distribution pattern of industry sector outlooks reflects a low-growth global economy that isn't particularly resilient to shocks," said Moody's Senior Vice President Bill Wolfe. "While we expect median cash flow to accelerate slightly over the next year, the global economy also faces growing uncertainty from potential geopolitical event risks."

Moody’s now sees global median EBITDA growth at 4.0%, after three years of growth from 3.0% to 3.5%, Wolfe said. Advanced and developing economies are progressing and commodity prices are stabilizing. However, “…unusual monetary conditions continue, with interest rates rising in the U.S. and quantitative easing and negative interest rates persisting in Europe and other advanced economies.”

Trade is increasing slowly as well, though weak global demand, protectionism and political risks in the U.S. and Europe could hamper greater growth, Moody’s said. Other potential risks to global growth include evolving technologies that could disrupt established industries, shifting U.S. trade policy, a quick rise in U.S. interest rates or suddenly strengthening dollar, a quick downturn in China and economic fragmentation in Europe.

– Nicholas Stern, senior editor

Puerto Rico Faces Lawsuits, Title III Restructuring from Debt Crisis

Bondholders filed to sue the Commonwealth of Puerto Rico on Tuesday after a year-long moratorium on lawsuits expired at midnight on Monday. This could lead to the initiation of a bankruptcy-like procedure for the Caribbean island to restructure its $70 billion debt.

According to the Associated Press, those who bought $16 billion worth of bonds backed by Puerto Rico’s sales tax said in the lawsuit that a plan by the government to cut its debt was unconstitutional. The suit comes as the administration of Gov. Ricardo Rosselo failed to negotiate a deal with bondholders after the May 1 deadline. Puerto Rico Chief of Staff William Villafane said his government prefers to reach an agreement with bondholders, but if negotiations fail, a bankruptcy-like process could be an option, the Associated Press said.

The debt-cutting process, known as Title III, is an in-court procedure that the country may be forced into. Beyond its debt, Puerto Rico has a 45% poverty rate and near-insolvent public health and pension systems, according to Reuters.

The lawsuit, filed in federal court in San Juan, accuses the government of impairing contractual rights of so-called COFINA bondholders, the debt for which is backed by sales tax revenues, and violating the due process clause of the U.S. Constitution. The expiration of the litigation freeze is expected to open the floodgates of others seeking to sue the Puerto Rican government in an attempt to block Rosselo’s plan to impose drastic repayment cuts, Reuters said.

The island is operating under a federal oversight board that has the ability to seek creditor losses through Title III, according to Bloomberg. The restructuring would be the largest in the $3.8 trillion municipal bond market. With the moratorium lifted, Puerto Rico may face adverse rulings on cases already filed. The island offered holders of general-obligation bonds as much as 77 cents on the dollar and proposed as much as 58 cents on the dollar for its sales tax debt as of a week ago, but the offer was rejected, Bloomberg said.

– Adam Fusco, associate editor

Defaults Down, Liquidity Flowing for U.S. Spec-Grade Companies

Defaults for U.S. speculative-grade, non-financial companies were down in the first quarter, with default rates hitting their historic average of 4.7%. And with consistent economic growth, recent refinancing activity and improvement in commodities, analysts with Moody’s Investors Service project the default rate will drop to 3.0% in a year.

"The number of U.S. speculative-grade defaults slipped to a two-year low in the first quarter of 2017," said Moody's Senior Vice President John Puchalla. "Recent refunding activity is helping to mitigate the effect of higher interest rates, alongside continued easing of strains in the commodities sector, even as oil and gas defaults remain elevated relative to other sectors."

Ten U.S. non-financial defaults were reported in the first quarter, down from 15 during the prior quarter, which represents the smallest number since the beginning of 2015, Moody’s Puchalla said. Four of the firms that defaulted in the first quarter were in the oil and gas sector, which is well below the 17 companies in the sector that defaulted in second quarter of 2016. Exploration and production companies made up three of the recent defaults. Moody’s predicts that liquidity and ratings trends point to more defaults among oilfield service companies later this year.

Moody’s Liquidity Stress Index (LSI) decreased to 5.3% in March from a six-year high of 10.3% a year prior. Economic growth is providing good cash flow, and a blooming energy recovery and “covenant-lite” loan structures are helping to ease liquidity and default risks for spec-grade companies in the U.S. Still, the energy LSI remains high at 12.9%.

"A large number of low-rated companies are managing to get by with weak balance sheets because their liquidity is keeping them afloat," Puchalla said. "While we expect economic growth to quicken in the next year, a risky speculative-grade borrower rating distribution will sow the seeds for more defaults if economic growth is unexpectedly weak, geopolitical issues disrupt trade flows or accessing the capital markets becomes more difficult."

– Nicholas Stern, senior editor