The World Bank said on Thursday, the world may be edging toward a global recession as central banks across the world simultaneously hike interest rates to combat persistent inflation.
The bank said in a new study, “The world’s three largest economies – the United States, China, and the euro area – have been slowing sharply, and even a “moderate hit to the global economy over the next year could tip it into recession.”
According to the report, the global economy has entered its steepest downturn since 1970 as a result of a post-recession recovery, and consumer confidence has already fallen more sharply than before previous recessions.
World Bank President David Malpass said “Global growth is slowing sharply, with further slowing likely as more countries fall into recession,” adding his worry that these trends would persist, with devastating consequences for emerging market and developing economies.
The bank said, Synchronised interest rate hikes under way globally and related policy actions were likely to continue well into next year, but might not be sufficient to bring inflation back down to levels seen before the COVID-19 pandemic.
The global core inflation rate, excluding energy, could remain at about 5% in 2023, nearly double its five-year average prior to the pandemic if supply disruptions and labor market pressures do not subside.
To drive inflation lower, central banks may need to raise interest rates by an additional 2 percentage points, on top of the 2-percentage point increase already seen over the 2021 average, it said.
But an increase of that size, along with financial-market stress, would slow global gross domestic product growth to 0.5% in 2023, or a 0.4% contraction in per–capita terms, which would meet the technical definition of a global recession, it added.
Policymakers should shift their focus from reducing consumption to boosting production, including efforts to generate additional investment and productivity gains said Malpass.
The bank pointed out that previous recessions have demonstrated the danger of allowing inflation to remain high while growth is weak, noting that the 1982 recession triggered more than 40 debt crises and resulted in a decade of stagnant growth in many developing nations.
A recent tightening of monetary and fiscal policies would help cut inflation, but the highly synchronous nature of the measures could compound the situation and steepen the global growth slowdown, said World Bank vice president Ayhan Kose.
Based on the findings of the study, central banks were advised to communicate clearly their policy decisions in order to combat inflation without triggering global recessions. Policymakers should also continue to provide targeted relief to vulnerable households and put in place credible medium-term fiscal plans.
