Global environment more fragile amid record high inflation, decelerating growth: Moody’s Analytics

BENGALURU: Moody’s Analytics on Monday lowered its global economic growth forecast to 2.7% for 2022 from 4.2% forecast in January, citing rising stagflation risks worldwide. It said the global environment has become more fragile as record-high inflation continues to gain momentum and growth decelerates.

It has projected global growth to slow down to 2.3% in 2023 from 3.6% estimated earlier.

In its report Global Outlook: Global Economy on Edge, Moody’s Analytics cautioned that while it has projected that the global economy will grow in 2022, any policy missteps or additional risks would increase the threat of a global recession in the next 12 months above its current assessment.

“Stagflation risks have risen worldwide, but a stagflationary environment would take months to be realised…Business sentiment remains muted and is consistent with a global economy that is just avoiding recession,” the agency said in a report.

It pointed out that the negative supply shock from Russia’s invasion of Ukraine remains the dominant risk to global growth this year. ”However, mounting geopolitical tensions in Taiwan, lockdowns in China, the cost-of-living crisis, rising borrowing costs, and the threat of energy shortages in Europe highlight the fragility of the global economy,” it said.

It highlighted that performance remained uneven among the world’s major economies: the US, China, Japan, India, and the five largest economies in Western Europe. “Outcomes will continue to diverge through 2023 due to differing trade and investment linkages to Russia and Ukraine, particularly in relation to energy products,” it said.

It also said that while the accelerating inflation throughout the globe has increased stagflation risks, a stagflationary environment would take months to be realised and its likelihood varies by region and country.

“We broadly define stagflation as CPI inflation that is at least 1 percentage point above the central bank’s equilibrium target, an unemployment rate that is at least 1 percentage point above the natural rate, and a persistence of these conditions over six to 12 months,” it explained.

It noted that while most major economies currently satisfy some of these criteria, primarily those related to price pressures, labour market weakness and overall persistence have not been observed.

Given varying exposure to energy-related inflation caused by the Russian invasion of Ukraine, and current central bank policies worldwide, it said that Europe would be highly susceptible to stagflation, with the UK having greater risks overall in the region.