In a comprehensive new study, the World Bank said that as central banks across the world lift interest rates aggressively, the likelihood of a global recession in 2023 is rising.
According to the report, these predicted interest rate increases and policy actions may still not be enough to bring global inflation down to pre-pandemic levels.
Investors expect global monetary policy rates to rise 2 percentage points over their 2021 average to reach almost 4 per cent through 2023.
The World Bank found that those interest rate increases could seethe global core inflation rate (excluding energy) approach 5 percent in 2023, if supply disruptions and labour market pressures don’t subside. This would be nearly double the five-year average before the pandemic.
Meanwhile, the report also indicated that central banks may need to further raise interest rates by 2 per cent to cut global inflation to a rate that coincides with their targets.
An increase of that size, accompanied by financial market stress, would slow global GDP growth to 0.5 per cent in 2023, the World Bank said. This would equal a 0.4 per cent contraction in per capita terms and would meet the technical definition of a global recession.
Commenting on the bank’s findings, World Bank Group president, David Malpass, said that global growth is slowing sharply and will continue to do so as other 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,” he continued.
The report identified that several indicators of global recession are already presenting themselves. Amid the steepest slowdown in the global economy following a post-recession recovery since 1970, consumer confidence has faced a more notable decline than in the lead up to previous global recessions.
As such, the study found that the impending economic climate requires countercyclical policy to support activity. However, policymakers in many countries are withdrawing support amid the threat of elevated inflation and a limited fiscal space.
“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,” said Mr Malpass.
Previous recessions illustrated the risk of allowing inflation to remain elevated for long while growth is weak, the bank noted, adding that the 1982 recession triggered more than 40 debt crises and was followed by a decade of lost growth in many developing economies.
Ayhan Kose, the World Bank’s acting vice president for equitable growth, finance, and institutions, warned that while recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation, the high synchronous nature of tightening across countries could be “mutually compounding” in 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,” Mr Kose said.
Experts from the study concluded that central banks can persist in their efforts to control inflation without tipping into a global recession. This, however, would require clear communication of policy decisions, and careful calibration of fiscal support withdrawal with continued targeted relief for vulnerable households.
