Global economy set for 'stable growth' by 2023 as headwinds diminish, Moody's says

The global economy is set to enter a period of "stable growth" by 2023 as the headwinds from the Covid-19 pandemic start to diminish next year, according to Moody's Investors Service.

Pandemic-induced headwinds, supply chain bottle-necks and labour shortages will start to diminish in 2022, Moody's said in a report on Thursday.

"Monetary and credit conditions will tighten as central banks look to remove pandemic-era liquidity and interest rate support and adopt a neutral stance," Madhavi Bokil, a senior vice president at Moody's and report author, said. "If the tightening is gradual and well communicated – thus, avoiding financial market surprises – we do not expect it to derail growth."

Central banks in developed economies globally are shifting their attention to the risk of inflation as supply chain logjams spur shortages amid strong demand.

On Wednesday, the US Federal Reserve said it will begin to wind down its $120-billion-a-month asset-purchase programme by $15 billion a month starting this November.

Moody's expects G20 countries, the world’s 20 largest economies, to grow 4.4 per cent collectively in 2022 and then expand 3.2 per cent in 2023, driven by strong household spending, inventory restocking and increased capital spending.

"The current mismatch between supply and demand as well as persistent labour market shortages should improve over coming quarters, allowing supply-side inflation pressures to moderate," it said.

Last week, the International Monetary Fund called on the G20, which comprises the world’s 20 largest economies, to put into effect a co-ordinated global strategy to end the Covid-19 pandemic and support the global economic recovery.

Moody's forecasts are underpinned by the key assumption that as the threat from the pandemic recedes, schools and workplaces will remain open, more workers will return to the labour force, demand for services will recover, travel will recover and migration will increase.

Its forecasts also assume supply logjams will clear "in due course", the ratings agency said, saying the pandemic remains a source of high forecast uncertainty.

One of the risks to the recovery is the potential for more persistent supply chain disruptions and a ratcheting up of inflation, without wages keeping up, Moody's said. This would lead to a reduction in household purchasing power.

The pandemic has also accelerated "geopolitical realignment", with tensions persisting between China, the US, as well as the US' partners on various issues, the report said.

Cyber risks will probably become more of a challenge for governments and rated entities going forward, the ratings agency said.

Last month, the IMF lowered its growth forecast for the global economy to 5.9 per cent for 2021 because of what it called a "hobbled" recovery due to the Covid-19 Delta variant, the divergence in the vaccine campaigns among countries, continuing supply-demand mismatches and rising inflation risks.

The global economy contracted 3.3 per cent last year.