Moody's lowers G20 economic growth forecast amid rising inflation and higher energy prices

Moody's Investors Service lowered its economic growth forecast for the world’s 20 largest economies as the Russia-Ukraine conflict continues to influence the larger global macroeconomic picture amid mounting inflationary and energy cost pressures.

Moody’s expects real gross domestic product of the Group of 20 economies (G20) to expand 2.5 per cent in 2022, down 6 percentage points from its 3.1 per cent growth estimate in May. It estimates 2.1 per cent growth next year, down from its earlier 2.9 per cent projection. Meanwhile, for G20 advanced economies, Moody's forecasts 2.1 per cent growth in 2022 and 1.1 per cent in 2023, while the projections for G20 emerging market countries stand at 3.3 per cent and 3.8 per cent, respectively.

"Global monetary and financial conditions will remain fairly restrictive through 2023," Madhavi Bokil, a senior vice president at Moody's, said in a report on Thursday. "Central banks will require decisive proof that high inflation no longer poses a threat to their policy objectives before letting up on their tight monetary stance. The challenging global economic environment of today will be resolved with a sharp and disinflationary slowdown in economic growth."

In July, the International Monetary Fund said it expected advanced economies to grow 2.5 per cent this year, compared with an earlier 3.3 per cent estimate, after expanding 5.2 per cent in 2021.

Inflation is forecast to average 8.3 per cent globally this year, with an aggregate of 6.6 per cent in advanced economies and 9.5 per cent across emerging market and developing economies, the IMF said in its July World Economic Outlook.

Moody’s revision largely reflects the spillover of Russia’s military offensive in Ukraine. While the agency does not expect the conflict to spread beyond Ukraine's borders, “such an event would mark a significant escalation”.

The four-decade high inflation in the US, the world's largest economy, as well as in the UK and a similar trajectory in other major European economies has led to central banks increasing interest rates.

However, it will be “tricky for central banks to navigate to an equilibrium where inflation falls but economic activity does not slip into a deep recession”, Moody’s said.

The sharp increase in energy prices and a slowdown in the Chinese economy is also having an effect on the economic outlook.

China’s Covid-zero policy has added to global supply chain disruption and crimped growth.

In the second quarter, the world's second-largest economy grew at its slowest pace since the coronavirus outbreak in 2020 due to renewed Covid-19 outbreaks and frequent lockdowns in major urban financial and manufacturing areas of the country.

Global monetary and financial conditions will remain restrictive through next year and even if core inflation continues to soften, “we believe that the US Federal Reserve would be averse to a premature loosening of financial conditions", Ms Bokil said.

“As a result, the fed funds rate, which is now around the estimated neutral rate, is likely to remain restrictive through 2023.”

For most other major central banks, upside risks to inflation remain and “keeping monetary policy relatively tight will be imperative for the credibility of their policy objectives”, she said.

Several crucial factors will determine the strength of economic activity in the remainder of this year and in 2023.

That includes the level to which interest rates would need to rise, particularly in the US, for inflation pressures to ease.

The effect of rate increases, not only on real economic activity in the US, but also on other advanced and emerging market countries, as well as the speed of China’s economic recovery, are among the determining factors, Moody’s said.