The world may be edging toward a global recession as central banks across the world simultaneously hike interest rates to combat persistent inflation, the World Bank said on Thursday.
"Global growth is slowing sharply, with further slowing likely as more countries fall into recession," World Bank President David Malpass said, adding that he worries that these trends would persist, with devastating consequences for emerging market and developing economies.
Synchronized interest rate hikes taking place 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, the bank said.
Unless supply disruptions and labor-market pressures subsided, the global core inflation rate, excluding energy, could stay at about 5 percent in 2023, nearly double the five-year average before the pandemic.
To drive inflation lower, central banks 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 percent in 2023, or a 0.4 percent contraction in per–capita terms, which would meet the technical definition of a global recession, it added.
Previous recessions showed the risk of allowing inflation to stay elevated for a long time 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 slowdown.
The study suggested that central banks 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.