World Bank warns increasing recession risk in 2023

A comprehensive new study by the World Bank suggests that the world may be edging toward a global recession in 2023 amid simultaneous rate hikes by central banks across the world.

The World Bank report highlighted that central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decadesa trend that is likely to continue well into next year.

Investors expect central banks to raise global monetary-policy rates to almost 4% through 2023an increase of more than 2% points over their 2021 average.

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, the report said.

 

Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5% in 2023nearly double the five-year average before the pandemic, the study finds.

To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2% points, according to the report's model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5% in 2023a 0.4% contraction in per-capita terms that would meet the technical definition of a global recession.

Central banks should persist in their efforts to control inflationand it can be done without touching off a global recession, the World bank study finds. For this, Central banks must communicate policy decisions clearly while safeguarding their independence. Fiscal authorities will need to carefully calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy objectives.

Other economic policymakers will need to join in the fight against inflationparticularly by taking strong steps to boost global supply. These include: easing labor-market constraints, boosting the global supply of commodities and strengthening global trade networks.

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