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 warned.
The World Bank said in a new study that 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.
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, the study noted.
According to the study, investors expect central banks to raise global monetary policy rates to almost four per cent through 2023, an increase of more than two percentage points over their 2021 average.
“If this were accompanied by financial-market stress, global GDP (gross domestic product) growth would slow to 0.5 per cent in 2023.
“That is a 0.4 per cent contraction in per-capita terms that would meet the technical definition of a global recession,” the study noted.
Ayhan Kose, the World Bank’s acting vice president for Equitable Growth, Finance, and Institutions, noted that“ Because the rate hikes are highly synchronous across countries, there 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’s acting vice president for Equitable Growth said.
“My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” said World Bank President David Malpass.
“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production,” said Malpass.
“Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction,” he added.
