The global economy is set to slow down as inflation remains stickier than expected — but there may be some “pockets of resilience,” according to Moody’s Investors Service.
“We’re expecting globally a slowdown in growth, and that will have an impact on [emerging markets] Asia through trade conditions as well as access to financing in the region,” Marie Diron, managing director for global sovereign and sub-sovereign risk at Moody’s Investors Service, told CNBC Thursday.
Diron said the slowdown can be attributed to three factors: higher interest rates that persist, China’s slowing growth, as well as financial system stresses.
While central banks have managed to steer the global economy and “create a disinflationary trend” by raising interest rates, inflation risks are still a sticking point, she said.
“There are still risks out there that inflation could prove stickier … than currently expected, and that would lead to higher risks for longer and slower growth,” explained the managing director.
In the last year and a half, the U.S. central bank has raised the benchmark fed funds rate to between 5.25% to 5.5%. Fed Chair Jerome Powell last Friday warned that additional interest rate increases could be on the table.
A second risk is financial system stress, Diron said.
“We’ve seen banks absorbing that period of higher rates, which has had some positive impacts on margins for some, but also needed an adjustment in businesses, an adjustment to continue to attract deposits,” she explained.
“It could be that there are pockets of stress that currently have not quite emerged that materialize maybe later this year on to next year.”
Finally, China is a third source of vulnerability.
Moody’s is not expecting a quick turnaround in the world’s second largest economy and sees “relatively slow growth in China with implications across the region,” Diron said.
“It is an outlook really clouded by downside risks. And that may have an implication for default rates.”
China has been battered by a slew of disappointing economic figures, with the latest economic data broadly missing expectations.
‘Pockets of resilience’
While Moody’s expects a coming slowdown, there may be some “pockets of resilience,” Diron said.
She acknowledged that “we do see a slowdown from this year onto next year,” but added: “We see relatively robust growth and favorable conditions in markets like India and Indonesia.”
Indonesia in particular has the potential to materialize the country’s “vast natural resources” and develop the downstream sectors, through processing of minerals through the value chain, Diron noted.
The Southeast Asian nation carries large natural deposits including tin, nickel, cobalt and bauxite — some of which are important raw materials for electric vehicle production.