Moody’s Predicts Slower Global Growth, But Identifies India and Indonesia as Potential Bright Spots

The global economy is facing a slowdown as inflation remains persistently high, although there may be some areas 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 in an interview with CNBC that the slowdown can be attributed to three main factors: ongoing high interest rates, China’s slowing growth, and stress in the financial system. While central banks have managed to create a disinflationary trend by raising interest rates, there are still risks of inflation remaining higher than expected, which could lead to longer and slower growth.

The Federal Reserve initiated a series of rate hikes starting in March 2022, in response to rising inflation. Over the past year and a half, the benchmark fed funds rate has been raised to a range of 5.25% to 5.5%. Fed Chair Jerome Powell recently indicated the possibility of further interest rate increases. Another risk contributing to the slowdown is stress in the financial system. Banks have managed to adapt to higher rates, which has positively impacted margins for some, but adjustments are still needed to continue attracting deposits. This could lead to stress emerging later this year or next year.

China represents a third source of vulnerability in the global economy. Moody’s expects slow growth in the world’s second largest economy, which will have implications across the region. The outlook for China is clouded by downside risks, which may result in higher default rates. China has recently experienced disappointing economic figures.