US and UK poised to slide into recession – Moody’s
Global growth will decelerate this year amid sticky inflation and higher borrowing costs, with the slowdown to be largely driven by advanced G20 economies, including the US, UK, and Germany, Moody’s Investor Service reported on Tuesday.
According to the ratings agency, real GDP growth in the G20 will slow to 2.1% in 2023 and 2.2% in 2024, from 2.7% in 2022.
“We expect very weak growth in key advanced economies in particular, including mild recessions in the US, UK, and Germany, and stagnant economic activity in France and Italy,” the report reads.
Risks from inflation or financial contagion are reportedly high, while US policymakers have reached a tentative deal on the country’s debt limit to avoid a default. A failure to adequately weaken aggregate demand could force some central banks to tighten even more, the agency warned.
“We forecast economic growth rates around 1% in 2023 and 2024 for the US economy, significantly lower than the 2.1% recorded in 2022 and below trend growth. These forecasts incorporate a mild recession – a couple of quarters of sequential contraction that will increase the unemployment rate to around 5.0% – in the second half of 2023,” Moody’s wrote.
“Our growth expectations already incorporate a significant pullback in overall demand for credit from high interest rates, so we have not materially changed our forecasts because of the recent stress at US regional banks,” the agency added.
In Germany’s case, manufacturing sector weakness, labor shortages, high interest rates, and sticky and elevated inflation have worsened the economic outlook, Moody’s noted.
After growing by 3.7% and 2.1% in January and February, industrial production in the Eurozone’s largest economy declined 3.4% in March. “While the automotive industry contributed the most to the decline, the deterioration was broad based, and consistent with the decline in new orders. April manufacturing PMI survey reveals continued contraction in orders,” Moody’s said.
The ratings agency has maintained its annual growth forecast of 0% in 2023 and 1.2% in 2024 for the German economy.
Meanwhile, economic activity in the UK continued to moderate given high inflationary pressures, Moody’s said, adding it expects the British economy to contract 0.1% this year.
The report indicated that in 2023, the impact of higher prices and tighter financing conditions has continued to hamper the economy. “As highlighted above, we expect BoE’s [Bank of England’s] policy rate to peak at 4.75% and for monetary policy to remain tight over the coming years, which will weigh on consumption and investment,” it said.
The International Monetary Fund announced last week that it no longer expects a recession in Britain this year, with its new growth projection foreseeing the nation edging ahead of some rich-world peers, including Germany.
However, Prime Minister Rishi Sunak has warned the UK economy could be in recession next year as stubbornly high inflation pushes interest rates to more than 5%.
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