Global economy more fragile amid record inflation, decelerating growth

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

It forecasts global growth to slow to 2.3% in 2023 from a previously estimated 3.6%.

In its Global Outlook: Global Economy on Edge report, Moody’s Analytics warned that while the global economy is forecast to grow in 2022, any policy missteps or additional risks raise the risk of a global recession in the next 12 months beyond its current one addition would increase rating.

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“Risks of stagflation have increased around the world, but it would take months for a stagflationary environment to materialize… Business sentiment remains subdued and consistent with a global economy just avoiding a recession,” the agency said in a report.

The negative supply shock from the outbreak of the Russia-Ukraine war remains the dominant risk to global growth this year, she stressed. “However, rising geopolitical tensions in Taiwan, lockdowns in China, the cost of living crisis, rising borrowing costs and the looming energy shortage in Europe underscore the fragility of the global economy,” the report said.

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The performance of the world’s major economies, including the US, China, Japan, India and the five largest economies in Western Europe, remains mixed this year, he said. “Outcomes will diverge further into 2023 due to different trade and investment linkages with Russia and Ukraine, particularly in energy products,” the report said.

Accelerating inflation around the world has increased the risk of stagflation, but a stagflationary environment would take months to materialize and its likelihood varies by region and country.

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“Broadly, we define stagflation as CPI inflation at least 1 percentage point above the central bank’s equilibrium target, an unemployment rate at least 1 percentage point above the natural rate, and a persistence of these conditions for six to 12 months.” said.

Most major economies meet some of these criteria, particularly those related to price pressures, but labor market weakness and overall persistence have not been observed, she noted.

Europe would be very vulnerable to stagflation, with the UK having greater risks in the region overall, according to the report.

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