Fri, 16 Sep 2022 04:43 PM IST
ACCORDING to a new study by the World Bank, as central banks around the world raise interest rates in response to inflation, the world may be on the verge of a global recession in 2023 and a string of financial crises in emerging markets and developing economies that would cause long-term harm.
The report says that the central banks around the world have been raising interest rates with unprecedented synchronicity this year, 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. Investors expect central banks to raise global monetary policy rates to almost 4 percent through 2023—an increase of more than 2 percentage points over their 2021 average," it said.
Unless supply disruptions and labor-market pressures abate, those interest-rate increases could leave the global core inflation rate (excluding energy) at around 5% in 2023, nearly double the five-year average before the pandemic, it said, adding that central banks may need to raise interest rates by another 2% to control inflation.
If this is accompanied by financial-market stress, global GDP growth will slow to 0.5% in 2023, representing a 0.4% contraction in per-capita terms and meeting the technical definition of a global 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 Bank has indicated several historical indicators of global recession are already flashing warnings and the global economy is now in its steepest slowdown following a post-recession recovery since 1970.
"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.
Global cooperation can help increase food and energy supply significantly. Policymakers should accelerate the transition to low-carbon energy sources and implement energy-saving measures for energy commodities.
Policymakers should work together to alleviate global supply constraints. They should advocate for a rules-based international economic order that protects against protectionism and fragmentation, which could further disrupt trade networks.
(With Agency Inputs)