World Bank Study Reveals Rising Risk Of Global Recession In 2023 Amid Rate Hikes

The World Bank has said that the world’s three largest economies – the US, China, and the euro area – have been slowing sharply

World Bank President David Malpass said that global growth is slowing sharply, with further slowing likely as more countries fall into recession.

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World Bank has said that the world may be edging toward a global recession as central banks across the globe simultaneously hike interest rates to fight persistent inflation, news agency Reuters said.

In a new study, the World Bank has said that the world’s three largest economies – the United States, China, and the euro area – have been slowing sharply, and even a “moderate hit to the global economy over the next year could tip it into recession”.

According to the report, the bank said the global economy was now in its steepest slowdown after a post-recession recovery since 1970, while it also added that consumer confidence had already dropped more rapidly than in the run-up to previous global recessions.

World Bank President David Malpass said, "Global growth is slowing sharply, with further slowing likely as more countries fall into recession," while adding his worry that these trends would persist, with devastating consequences for emerging market and developing economies.

The study of the bank revealed that synchronised interest rate hikes under way globally and related policy actions were likely to continue well into next year, but might not be sufficient to bring inflation back down to levels seen before the Covid-19 pandemic.

Unless supply disruptions and labour-market pressures subsided, the international core inflation rate, excluding energy, could stay at about 5 per cent in 2023, nearly double the five-year average before the pandemic, the study pointed out.

Central banks of several countries may need to raise interest rates by an additional 2 percentage points, on top of the 2-percentage point increase already seen over the 2021 average, it said. But an increase of that size, along with financial-market stress, would slow global gross domestic product growth to 0.5 per cent in 2023, or a 0.4 per cent contraction in per-capita terms, which would meet the technical definition of a global recession, the World Bank said.

According to Malpass, policymakers should shift their focus from reducing consumption to boosting production, including efforts to generate additional investment and productivity gains.

Previous recessions showed the risk of allowing inflation to stay elevated for long while growth is weak, the bank said, noting that the 1982 recession triggered more than 40 debt crises and ushered in a decade of lost growth in many developing economies.

World Bank Vice-President Ayhan Kose said a recent tightening of monetary and fiscal policies would help cut inflation, but the highly synchronous nature of the measures could compound the situation and steepen the global growth slump.

The study showed that central banks across the globe could combat inflation without touching off a global recession by communicating their policy decisions clearly, while policymakers should put in place credible medium-term fiscal plans and continue to provide targeted relief to vulnerable households.