Central banks’ efforts to fight inflation by simultaneously raising interest rates across the world could drive a global recession, according to a report released last week by the World Bank.
Investors expect central banks to raise global monetary-policy rates to almost 4% through 2023, according to the World Bank. However, those interest-rate increases could still leave global core inflation (excluding energy) at about 5% in 2023 — nearly double the five-year average before the pandemic — unless supply chain disruptions and labor-market pressures subside. To cut global inflation to target rates, central banks may need to raise interest rates further — which could cause global GDP growth to contract 0.4% in per-capita terms in 2023 and meet the technical definition of a global recession.
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession,” World Bank Group President David Malpass said. “My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies.”
Malpass said policymakers should shift their focus from reducing consumption to boosting production to help stave off a global recession.
“Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction,” he said.
The World Bank noted the global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. 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.