Global economic recovery to face complex challenges

Sharp rise in crude oil, food, and fertilizer prices will weigh on household finances and spending in the months ahead. Moody's Investors Service has slashed India's economic growth projection to 8.8 percent for 2022 from 9.1 percent earlier, citing high inflation. It also slashed its forecast for advanced economies from 3.2% to 2.6%.

The Rate increase is going to prevent energy and food inflation from becoming more generalised and will slow the demand recovery’s momentum, the rating agency said in its latest Global Macro Outlook. However, Moody’s added that unless global crude oil and food prices rise further, the economy seems strong enough to maintain solid growth momentum. High-frequency data suggest that the momentum from Q4 2021 carried through into the first four months of this year because of strong reopening momentum.

Strong credit growth, a large increase in investment intentions announced by the corporate sector, and a high budget allocation to capital spending by the government indicate that the investment cycle is strengthening.

The main drivers of the slowing economic momentum are the ongoing supply shocks that are stoking inflation and eroding consumer purchasing power, and a shift toward more hawkish monetary policy globally, accompanied by financial market volatility, asset repricing and tighter credit conditions, it said. The agency said the post-pandemic global economic recovery faces a complex set of challenges.

Several crosscurrents have hit the global economy all at once, and will slow growth more significantly than we envisaged only a few months ago. The economic spill-overs of the Russia-Ukraine military conflict are still unfolding, as is the effect on global growth from the slowdown in China amid strict enforcement of its zero-Covid policy. Although we expect headline inflation rates to ease through next year, price levels remain high and will weigh on consumer demand, it added.

Moody’s said the primary focus of inflation-targeting central banks in the current scenario will be to keep households’ medium-term inflation expectations from rising above targets, thereby preventing the emergence of a self-perpetuating and vicious wage-price spiral. All together, these developments set the stage for a more pronounced slowing of the global economy than we envisaged only a few months ago. 

S Mohini Ratna, Editor, VARINDIA