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Risk of Global Recession In 2023 Rises Amid Simultaneous Rate Hikes – World Bank

September 16, 2022
Stephen KotochiebyStephen Kotochie
in Around the Globe, One Top Story
0
Risk of Global Recession In 2023 Rises Amid Simultaneous Rate Hikes – World Bank

As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, the World Bank warned in a new comprehensive study.

Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades— a trend that is likely to continue well into next year, according to the report.

Yet, the report noted that the currently expected trajectory of interest rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic. Investors expect central banks to raise global monetary-policy rates to almost 4 percent through 2023— an increase of more than 2 percentage points over their 2021 average, according to the World Bank.

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Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic, the study found.

To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, according to the report’s model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 percent in 2023—a 0.4 percent contraction in per–capita terms that would meet the technical definition of a global recession.

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies.

 “To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.” 

World Bank Group President, David Malpass

The study highlighted the unusually fraught circumstances under which central banks are fighting inflation today.

Historical indicators of global recessions

Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions.

The world’s three largest economies— the United States, China, and the euro area— have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.

The study relied on insights from previous global recessions to analyze the recent evolution of economic activity and presents scenarios for 2022–24. A slowdown— such that the one now underway— typically calls for countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply.

The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak.

The 1982 global recession coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020. It triggered more than 40 debt crises and was followed by a decade of lost growth in many developing economies.

Ayhan Kose, World Bank’s Acting Vice President for Equitable Growth, Finance, and Institutions, noted that the recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation.

“But because they are highly synchronous across countries, they could be mutually compounding in tightening financial conditions and steepening the global growth slowdown. Policymakers in emerging market and developing economies need to stand ready to manage the potential spillovers from globally synchronous tightening of policies.”

Ayhan Kose

The World Bank noted that Central banks should persist in their efforts to control inflation. According to the World Bank, this can be done without igniting a global recession but it will require concerted action by a variety of policymakers.

READ ALSO: Government Reiterates Commitment To Meet Climate-Related SDGs

Tags: COVID-19GDPGlobal RecessioninflationWorld Bank

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