Moody’s downsize global growth expectations to 2.8%

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Moody’s Analytics has downsized Global GDP growth forecast to 2.8% in its 2022 July baseline, down from 3.2% in the March forecast.

US GDP growth is forecast at 1.9% in July, 1.3 percentage points weaker than the expectation in March and are driven by higher inflation eating into purchasing power, a more aggressive Federal Reserve, and a cooler labour market.

Meanwhile, the euro zone GDP growth forecast has weakened to 2.8% in 2022, encouraged lower by the region’s disproportionate exposure to the fallout from Russia’s invasion of Ukraine. Sanctions on Russia that cause price spikes and supply concerns, including for critical food and energy, cloud the near-term outlook. Consumption in the euro zone will take even longer to return to pre-pandemic levels.

China’s economy has been turbulent and volatile in the first half of 2022. Manufacturing and services faced significant challenges, particularly in April as aggressive and extended lockdowns in large cities took place. COVID-19 control measures caused significant disruptions and led to a large drop in consumption, investment and production. Localised lockdowns since then have been disruptive to a lesser degree.

The second half of 2022 looks equally as challenging for China despite policymakers pledging support. The People’s Bank of China has pledged to do what it takes to improve the demand environment. Fiscal policy has also been expansionary. But stimulus to date has had limited potency.

The zero-Covid policy is an ongoing headwind because the threat of further lockdowns has increased near-term uncertainty, making businesses and households reluctant to invest and spend. Pandemic responses have repeatedly shown that stimulus cannot completely insulate economies from lockdowns. Despite this, China is prioritising public health concerns over economic consequences.

The property market is a useful example of stimulus lacking potency. Despite local governments easing buying curbs, cutting lending rates, and partially relaxing ownership rules, house price growth remains weak.

The property market is an important driver of China’s economy, accounting for about 25% of GDP. We expect band-aid policy solutions to be introduced over the second half of 2022, but these are unlikely to be sufficient to reinvigorate the economy to achieve the GDP growth target of 5.5%. In our August baseline, we will downwardly revise our full-year GDP growth forecast to south of 4%. This contrasts with the government’s 5.5% target.