The world economies may fall into a global recession next year amid aggressive monetary policy tightening by central banks to tame inflation, the World Bank said. Several historical indicators of global recessions are already flashing warnings, it said in a new study, adding that the global economy is now in its steepest slowdown, following a post-recession recovery since 1970. “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,” the World Bank said.
Aside from recession, a string of financial crises in emerging markets and developing economies is also likely to do them “lasting harm”, the report said. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. Major central banks around the world have been raising interest rates this year with a degree of synchronicity that has not been seen over the past 50 years, and this trend is likely to continue well into next year, according to the World Bank report.
Synchronous policy rate hikes by global central banks
These interest-rate increases and other policy actions may still not be enough to bring global inflation back down to pre-pandemic levels. Investors expect central banks to raise global monetary-policy rates to almost 4 per cent over 2023, an increase of over 2 percentage points over their 2021 average. Unless supply disruptions and labour-market pressures subside, these rate hikes could leave the global core inflation rate (excluding energy) at about 5 per cent next year, nearly double the five-year average before the pandemic.
Global GDP growth to slow down to 0.5%, EMs, developing economies to suffer
In order 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. This rate hike, if accompanied by financial-market stress, would slow global GDP growth down to 0.5 per cent next year, 0.4 per cent contraction in per–capita terms that would meet the technical definition of a global recession, World Bank noted. “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 markets and developing economies,” said David Malpass, President, World Bank Group.
He further emphasised that policymakers focus on boosting production rather than reducing consumption could achieve low inflation rates, currency stability and faster growth. “Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction,” Malpass said.
Taming inflation without compromising growth
According to the report, central banks can control inflation without risking recession. But, it will require coordinated action by a variety of policymakers. While in advanced economies, central banks should keep in mind the cross-border spillover effects of monetary tightening, in emerging markets and developing economies, the focus should be on strengthening macroprudential regulations and building foreign-exchange reserves, the study noted. Meanwhile, fiscal authorities will need to carefully calibrate the withdrawal of support measures. Easing labour-market constraints, Boosting global supply of commodities, and Strengthening global trade networks have been listed as some measures which can be used by economic policymakers to fight inflation by boosting global supply.