As central banks across the globe have resorted to a wave of simultaneous interest rate hikes, which may still prove to be inadequate to tame inflation, the world could be edging towards a recession in 2023, a new study by the World Bank has warned. It could also lead to a string of financial crises in emerging market and developing economies that would cause them “lasting harm”, it said.
The study pointed out that central banks have been hiking 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. “Yet 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,” it said.
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Investors expect central banks to raise global monetary-policy rates to almost 4% through 2023, which will mark an increase of more than 2 percentage points over their 2021 average.
According to the study, unless supply disruptions and labor-market pressures subside, the interest-rate increases could leave the global inflation rate (excluding energy) at about 5% in 2023—almost double the five-year average before the pandemic.
Central banks may need to hike the interest rates by an additional 2 percentage points to rein in inflation at targetted levels, accrodingt the study. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5% in 2023. This will mean a 0.4% contraction in per–capita terms, which would meet the technical definition of a global recession, it said.
The International Monetary Fund, too, had in July delivered an early warning of a possible global recession in 2023 and slashed its global growth projections for 2022 and 2023. Downside risks from elevated inflation, tight monetary conditions and the Ukraine war are adding to the already “gloomy and more uncertain” global outlook, the IMF had said, cautioning that the spike in inflationary pressure, if unchecked, could ultimately trigger recession.
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World Bank Group President David Malpass said: “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,” Malpass said.
