Rising rates threaten a global recession, says World Bank.
In a warning to central banks, the World Bank suggests that the trajectory of interest rate increases may not be enough to prevent a worldwide recession in 2023.
According to a recent research from the organization, global core inflation might reach 5%, nearly double the pre-pandemic five-year norm, if supply disruptions and labor-market pressures don’t abate.
The World Bank expects that rates may need to increase by an extra two percentage points to meet inflation targets, even though investors anticipate central banks to hike rates to around 4% next year, which is more than two percentage points higher than the average for 2021.
If financial market stress resulted from this, global GDP growth would slow to 0.5%, a contraction that technically qualifies as a global recession.
The world economy is particularly vulnerable due to an extraordinary convergence of causes, and given that the US, China, and eurozone economies are already slowing significantly, even a slight slowdown could send the entire planet into a recession.
Ayhan Kose, the World Bank’s acting vice president, stated that although the recent monetary and fiscal tightening actions would probably assist decrease inflation, they could be “mutually compounding in tightening financial conditions and steepening the global GDP slowdown.”
The author continued that policymakers in emerging market and developing economies needed to be prepared to handle any potential spillovers from worldwide synchronised tightening of policies.
Moreover, the effect on emerging markets was of particular concern to David Malpass, president of the World Bank Group.
The World Bank, however, asserts that inflation may be managed without bringing about a global recession, although doing so would necessitate “coordinated action by a range of authorities”.
Central banks ought to safeguard their independence and communicate policy decisions clearly.
Advanced economies must be careful of the cross-border effects of monetary tightening, while emerging and developing markets need to strengthen macroprudential regulations and accumulate foreign exchange reserves.
While encouraging global cooperation to boost food and energy supply, government officials should put policies in place to support labor force participation and lessen pricing pressures. It is also necessary to accelerate the switch to low-carbon energy.
