Central bank rate hikes pose risk of global recession: World Bank
27 Sep 2022
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The World Bank has warned the world may be edging toward a global recession in 2023, as central banks around the world continue to raise interest rates to tame inflation that has assumed global proportion.
While the current levels of interest rate hikes and other policy actions may not be sufficient to bring global inflation back to pre-pandemic levels, the global lender said the pace and degree of synchronicity could hurt demand and result in output cuts.
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.
"If this were accompanied by financial-market stress, global GDP (gross domestic product) growth would slow to 0.5 per cent in 2023, a 0.4 per cent contraction in per-capita terms that would meet the technical definition of a global recession," the study noted.
Since the rate hikes are highly synchronous across countries, they could be "mutually compounding" in tightening financial conditions and steepening the global growth slowdown, Ayhan Kose, the World Bank's acting vice president for Equitable Growth, Finance, and Institutions, noted.
"Policymakers in emerging market and developing economies need to stand ready to manage the potential spillovers from globally synchronous tightening of policies," Kose added.
A string of financial crises in emerging market and developing economies would do them lasting harm, according to the study.
"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.
"Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction," he added.
