As interest rates rise simultaneously, the risk of a global recession increases: World Bank

The 16th of September, Washington [US]: According to a new World Bank study, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging markets and developing economies that would harm them in the long run as central banks around the world simultaneously raise interest rates in response to inflation.

According to the report, interest rates have been rising this year by central banks all over the world with a degree of coherence unseen in the previous fifty years. This trend is anticipated to last 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. Investors expect central banks to raise global monetary-policy rates to almost 4 per cent through 2023–an increase of more than 2 percentage points over their 2021 average,” it said.

It added that central banks may need to raise interest rates by an additional 2 percentage points to control inflation if supply disruptions and labour market pressures don’t ease, which would leave the global core inflation rate (excluding energy) at about 5% in 2023, nearly double the five-year average before the pandemic.

If financial market stress were to accompany this, global GDP growth would fall to 0.5% in 2023, a per-capita contraction of 0.4% that would technically qualify as a worldwide recession.

“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 World Bank Group President David Malpass.

“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 added.

The world economy is already seeing its worst downturn after a post-crisis recovery since 1970, according to the World Bank, which also noted that several historical indications of a global recession are already flashing warnings.

“The world’s three largest economies–the United States, China, and the euro area–have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession,” it added.

Central banks should continue trying to keep inflation under control, it was argued, and it is their firm belief that this can be done without causing a global recession. The following are some coordinated actions needed from the decision-makers:

Clear communication of policy choices is required while central banks maintain their independence. This may serve to stabilise inflation expectations and lessen the amount of tightening required. Central banks in advanced economies should be aware of the consequences of monetary tightening on other countries. They should enhance macroprudential laws and increase foreign exchange reserves in emerging markets and developing economies.

The withdrawal of the fiscal support measures will need to be carefully calibrated by the fiscal authorities while ensuring coherence with monetary policy goals. It is anticipated that the percentage of nations tightening their fiscal policies in 2019 would increase to its greatest level since the early 1990s. The effects of monetary policy on growth can be amplified as a result. Additionally, decision-makers should implement dependable medium-term economic plans and offer vulnerable households specific assistance.

In particular, they will need to take decisive action to increase global supply in order to join other economic officials in the fight against inflation. These include:

• Easing labour market restrictions Policies must work to lower pricing pressures and boost labour force participation. Policies affecting the labour market may help reallocate displaced workers.
• Enhancing the supply of commodities around the world. The availability of food and energy may be increased significantly with global cooperation. Politicians should propose steps to cut energy usage and hasten the switch to low-carbon energy sources for commodities like energy.
• Enhancing international commerce networks. To ease supply constraints around the world, policymakers should work together. They ought to be in favour of a global economic system founded on norms, one that protects trade networks from further disruption caused by fragmentation and protectionism.

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