While the global economy has enjoyed upside surprises this year, the risks remain to the downside as the effects of global monetary policy tightening continue to bite, says Moody’s Investors Service.
In a new report, the rating agency said the economy started 2023 on a positive note, with stronger growth in China amid a shift in pandemic policy, an easing of Europe’s energy crisis and retreating inflation.
Yet the lagging effects of tighter monetary policy will slow growth this year, as most major economies face slowdowns from higher rates, Moody’s said.
Against this backdrop, it forecasts that G20 global economic growth will downshift to 2.0% this year from 2.7% in 2022, before rising again to 2.4% in 2024.
Moody’s also expects inflation to continue moderating, but that a decline to the central banks’ targets is still not guaranteed.
“Central banks will likely keep interest rates restrictive for longer than financial markets expect,” it said, noting that policymakers are facing the crucial question of whether or not they’ve tightened enough to subdue inflation.
“While there is a sense that the end to tightening is near, it is unclear how many more rate increases would be appropriate and for how long interest rates will remain restrictive,” it said.
The U.S. Federal Reserve and other central banks could be forced into even more aggressive tightening “if loosening financial conditions undermine their efforts to soften aggregate demand.”