Global economy tilts towards sharp slowdown, India ‘may also lose pace’: Moody’s Analytics | Today’s news

New Delhi: The global economy is headed for a phase of slower growth over the next two years, with India also expected to lose steam as a wide-ranging conflict between the US and Iran threatens to trigger a new energy shock, reignite inflation and force central banks to tighten monetary policy, Moody’s Analytics said.

In its latest “Running Hot, Running Cold” global outlook, Moody’s said the world economy is becoming increasingly fragmented, with countries and industries benefiting from an artificial intelligence (AI) investment boom outpacing those weighed down by geopolitical tensions, higher commodity prices and trade disruptions.

The report says the combination of geopolitical uncertainty, persistent inflationary pressures and tight monetary conditions means the balance of risks remains decidedly to the downside. “The global economy is unlikely to derail. However, uncertainty around the baseline forecast is high and it would not take much to tilt the trajectory towards a sharper slowdown or even recession,” he said.

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The agency expects global GDP growth to slow to 2.5% in 2026 from 2.9% the previous year. before recovering modestly to 2.8% in 2027, leaving it below the global economy’s long-term potential growth rate of more than 3%.

For India, the report did not provide a numerical forecast, but said the country would “lose pace” along with the broader global slowdown, reflecting weaker external demand, higher energy costs and tighter global financial conditions.

Already reduced

The Reserve Bank of India (RBI) has already cut India’s real GDP growth projection for FY 2026-27 to 6.6% from an earlier estimate of 6.9%. This view is shared by the World Bank, which has also pegged India’s GDP growth at 6.6% this fiscal year. The Asian Development Bank, which had projected India’s GDP growth for this fiscal year at 6.9% in April, also cut its projection to 6.6% for the year. Meanwhile, the International Monetary Fund (IMF) marginally cut its growth outlook to 6.4% for FY27, down 10 basis points from its previous estimate of 6.5%.

“The boom in artificial intelligence has prevented a steeper decline,” Moody’s said, noting that massive investment in data centers, semiconductors and computing infrastructure has created a K-shaped global economy where technology-driven sectors continue to expand while traditional industries struggle with higher costs and geopolitical uncertainty.

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But economists at the rating agency warned that the resilience offered by AI may not be enough if tensions in West Asia continue to escalate. A prolonged blackout in West Asia and renewed attacks affecting shipping through the Strait of Hormuz could sharply increase oil prices, increase global inflation and undermine economic growth.

Although a brief ceasefire briefly restored shipping along the strategic waterway, Moody’s noted that the situation remains fragile after renewed threats of military action and attacks in the region.

“A new flare-up in the Middle East or a new and protracted disruption to commodities moving through the Strait of Hormuz would send oil prices well above the baseline, lift inflation and hurt growth,” the report said.

Sharpening compromises

Such a scenario would sharpen the trade-offs central banks face – cutting rates to support the real economy and the risk of faster inflation, or raising rates to curb inflation and further damage growth, Moody’s Analytics said. “Rate hikes will not reopen the Strait of Hormuz,” Moody’s said, adding that tighter monetary policy cannot address supply-driven inflation stemming from geopolitical disruptions.

Still, he expects several central banks to maintain restrictive policies for longer, with further tightening likely from institutions such as the European Central Bank and the Bank of Japan later this year.

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The report warns that higher borrowing costs could further dampen business investment and consumer spending, deepening the slowdown already underway across major economies.

The US is expected to grow by an average of 2% in 2026 and 2027, well below its recent pace, while China is expected to slow from 4.6% in 2026 to 4.2% in 2027 due to weak domestic consumption and continued stress in the real estate sector, Moody’s Analytics said. The eurozone is expected to expand by just 0.8% in 2026, improving to 1.6% in 2027, while Japan is expected to grow by less than 0.5% annually over the two-year period.

Main support

Moody’s said the AI ​​investment cycle has become a major supporter of global growth, particularly in Asia, where semiconductor production and electronics exports have increased.

Taiwan, South Korea, and other tech-intensive economies benefited disproportionately from growing demand for AI infrastructure, while countries less integrated into global technology supply chains experienced weaker growth.

India has also benefited from stronger electronics exports as part of the broader AI supply chain, although the gains are smaller than those seen in semiconductor manufacturing hubs.

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In addition to geopolitical tensions, Moody’s identified several other factors clouding the outlook, including unresolved US tariff policies, growing trade friction between China and the European Union, curbs on rare earth exports and increased valuations in financial markets.

For India, whose economy has remained one of the fastest growing among major countries, the report suggests external headwinds rather than domestic weaknesses are likely to be the main constraint over the next two years, particularly if higher oil prices widen the import bill, boost inflation and slow any easing of interest rates.