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Despite the conflict in Ukraine, sky-high inflation and commodity prices, and the uncertainty stemming from the transition to post-pandemic fiscal and monetary policies, Moody’s Investors Service says the global economy is transitioning to stable growth.

In a new report, the rating agency forecast 4.3% growth for the G20 in 2022. That’s down from 5.9% in 2021 but still above the long-term trend as the tentative recovery stabilizes and the global public health risk posed by Covid-19 recedes.

For the world’s advanced economies, the report said the trend to fewer pandemic-related restrictions and healthy private-sector balance sheets will underpin growth, even amid lingering Covid-19 concerns, inflation and supply chain challenges.

“In the U.S., the economy is moving into a late-cycle expansion as the labour market approaches full employment, growth rates decelerate from 2021 peaks, policy support subsides and reopening momentum abates,” it said, noting that Canada, Australia and Europe are following a similar path.

“In these regions, declining Covid cases after omicron, high vaccination rates and excess savings accumulated during the past two years support a rebound in activity,” Moody’s said.

For emerging markets, the recovery is less synchronized and more fragile, it noted. The pace of recovery in these markets will depend on each country’s inherent economic strengths and weaknesses, it suggested.

“China’s strict Covid-19 measures, decelerating industrial activity, property sector slowdown and ongoing regulatory actions are risks to the economy,” it said. “In Mexico, Brazil and Argentina, recoveries are losing steam amid elevated inflation pressures.”

While central banks in several emerging markets are already hiking interest rates, the strong recovery and surging inflation will have advanced economies raising rates sooner than previously expected, Moody’s said.

“The global transition to late cycle dynamics will require most forward-looking central banks to prevent overheating of the economy and the emergence of macroeconomic imbalances; and move to a neutral monetary policy stance to prepare for the next unforeseen shock,” it said.

However, Russia’s invasion of Ukraine will “undoubtedly complicate” monetary policy decisions, the report noted. Among other things, sharply higher energy prices could ramp up inflation expectations.

“If central bank policymakers view the pass-through on inflation from higher energy prices as a more permanent rather than a transitionary event, they may accelerate their pace of tightening — at the risk of dampening economic growth,” Moody’s said. “Overly tight monetary policy could tip the economy into a recession.”

Indeed, the situation “poses a serious risk to the ongoing global economic expansion,” it said.

A quick de-escalation of the conflict would have a limited impact on the global economy, Moody’s said — but a more protracted clash would threaten the recovery, primarily through a severe energy price shock.

“Higher energy costs, if sustained, will directly weigh on household and business budgets globally by increasing the cost of transportation, heating, energy-intensive manufacturing and production of variety of products, including fertilizer and food,” it said.

“Therefore, the downside risk to the global economy, which is already pressured by inflation, is significant.”

Other risks to the outlook include a pandemic resurgence, “repeated supply shocks, monetary policy missteps, fallout from China’s property market downturn to other economies, asset market volatility, and rising social discontent,” Moody’s cautioned.

Looking ahead to 2023, Moody’s said that it sees global growth slowing further to 3.2% “as pandemic-fueled output losses are largely recouped and advanced economies’ labor markets approach a full recovery.”