Stubbornly high inflation and higher borrowing costs are poised to drive the economies of the UK, Germany and US into recession, the leading rating agency Moody’s has warned.
In a downbeat forecast for growth across advanced G20 economies, it said a ramping up of interest rates by central banks on both sides of the Atlantic was expected to weigh on economic growth this year.
“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,” Moody’s said in a report.
It comes as the world’s most influential central banks attempt to squeeze high inflation out of the system through the toughest round of rate increases in decades, amid concern over the potential for persistent pressure on living standards.
Official estimates on Wednesday revealed a mixed picture across the eurozone, underscoring the challenge facing the European Central Bank, after French inflation eased to its lowest level in a year but Italy overshot analyst expectations.
France’s annual inflation rate fell by more than expected to 6% in May, down from 6.9% in April. However, inflation fell by significantly less than anticipated in Italy to stand at 8.1% in May, down from 8.7% a month earlier.
German inflation fell by more than expected to 6.3%, down from 7.6% a month earlier. The figures followed a bigger-than-expected decline in Spain, with a fall in inflation to 2.9%, raising hopes that price pressures across the eurozone could cool rapidly this year. Official estimates for the 20-country bloc as a whole are due on Thursday.
Rory Fennessy, an economist at the consultancy Oxford Economics, said: “With inflation surprising to the downside in Germany and France, it is likely that eurozone inflation came down more than expected in May, closer to 6% from 7% in April. If inflation in June surprises to the downside, the chances of a July rate hike will diminish significantly.”
Christine Lagarde, president of the ECB, warned this month that the eurozone’s central bank still had “more ground to cover” on interest rates, after increasing its key deposit rate by a quarter point to 3.25%. “We are not pausing. That’s very clear,” she said.
Revised official figures for Germany revealed last week that the country slipped into recession at the start of this year, while concern is also mounting over the strength of the UK and US economies. The technical definition of a recession is two consecutive quarters of shrinking gross domestic product.
Official figures last week showed inflation remained stubbornly high in the UK as households come under pressure from the fastest annual rise in food prices since the late 1970s. Britain has the highest inflation rate in the G7 group of advanced economies, after a fall to 8.7% in April, down from 10.1% in March.
UK inflation figures for May are due to be published next month, with analysts warning that Rishi Sunak’s target to halve the inflation rate by the end of this year is increasingly at risk.
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Economists said last week that Britain’s stubbornly high levels of inflation were likely to push the Bank of England to push interest rates above 5% in order to “engineer” the conditions for a recession to bring down inflation.
Moody’s said it expected Threadneedle Street to raise its key base rate by “at least” another quarter-point to 4.75% when the Bank’s policymakers next meet in June.
US consumer prices have been slowing in recent months, dropping to an annual inflation rate of 4.9% in April. However, analysts have warned the US Federal Reserve could be forced to keep interest rates at high levels for longer than previously anticipated to squeeze persistent inflation out of the system.
Economists are divided on whether the US could fall into recession in the second half of this year or in 2024. However, some suggest the country could manage a “soft landing” from high inflation without a recession.
Moody’s warned that recent turmoil in the US banking system had highlighted how the rate cycle could trigger risks in the financial system. While strength in the US jobs market could delay an economic downturn, it said this might also risk fuelling high inflation – making it more likely for the US Federal Reserve to raise interest rates further.
“Cooling economic activity and weaker labour market are necessary conditions for inflationary pressures in the economy to ease. Too much resilience for too long would require even tighter monetary policy,” the report said.
