The Global Economy Set to Slow Down, but Some Resilience Remains
The global economy is expected to experience a slowdown due to persistently high inflation, but there are still some “pockets of resilience,” according to Moody’s Investors Service.
Marie Diron, Managing Director for Global Sovereign and Sub-Sovereign Risk at Moody’s Investors Service, stated that the slowdown will impact Asia’s emerging markets through trade conditions and access to financing in the region.
Diron attributed the slowdown to three factors: sustained higher interest rates, China’s slowing growth, and financial system stresses.
Although central banks have managed to steer the global economy towards a disinflationary trend by increasing interest rates, inflation risks continue to pose a challenge.
According to Diron, there are still risks that inflation could prove to be stickier than expected, leading to prolonged slower growth.
The Federal Reserve initiated a series of interest rate hikes in March 2022 in response to the highest inflation levels in 40 years.
Over the past year and a half, the U.S. central bank has raised the benchmark fed funds rate to a range of 5.25% to 5.5%. Federal Reserve Chair Jerome Powell recently warned that additional rate increases could be considered.
Diron identified the second risk as financial system stress, stating that banks have absorbed the impact of higher rates, leading to positive impacts on margins for some but requiring adjustments in businesses to attract deposits.
She also noted the possibility of emerging pockets of stress that may materialize later this year or in the next.
Lastly, China represents a third source of vulnerability.
Moody’s does not anticipate a swift recovery in the world’s second-largest economy and foresees relatively slow growth with implications for the entire region.
Diron highlighted the downside risks clouding China’s outlook and their potential impact on default rates.
China has recently faced disappointing economic figures, with the latest data falling short of expectations.
Finding Resilience in Certain Markets
While Moody’s expects an overall slowdown, Diron pointed out the existence of some “pockets of resilience.”
She acknowledged the projected slowdown for the coming years but emphasized the relatively robust growth and favorable conditions in markets such as India and Indonesia.
Specifically, Diron highlighted Indonesia’s potential to leverage its abundant natural resources and develop downstream sectors, including mineral processing for electric vehicle production.
The Southeast Asian nation possesses significant deposits of minerals like tin, nickel, cobalt, and bauxite, which are crucial raw materials for the production of electric vehicles.
