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Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes, World Bank

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Survey highlights need for policies to curb inflation without exacerbating recession risks

Washington, September 15, 2022— As central banks around the world simultaneously raise interest rates in response to inflation, the world is approaching a global recession in 2023, triggering a series of financial shocks that will hit emerging market and developing economies in the long run. You may be in danger. A new study by the World Bank.

Central banks around the world have raised interest rates this year with a degree of synchronicity not seen in the last 50 years, and the trend is likely to continue next year, according to the report. However, the currently anticipated trajectory of interest rate hikes and other policy actions may not be enough to bring global inflation back to pre-pandemic levels. Investors expect the central bank to raise the global monetary policy rate to almost 4% by his 2023.

Unless supply disruptions and labor market pressures subside, these rate hikes could keep global core inflation (excluding energy) at around 5% in 2023. This is almost double the five-year average before the pandemic. The report’s model suggests that central banks may need to raise interest rates by another 2% to bring global inflation down to match their targets. If this is accompanied by financial market stress, global GDP growth will slow to he 0.5% in 2023. This is a contraction of 0.4% per capita that meets the technical definition of a global recession.

“Global economic growth has slowed sharply and may slow further as more countries enter recession. It has long-term consequences that have devastating effects on people. Said World Bank Group President David Malpass. To achieve low inflation, currency stability and faster growth, policymakers can shift their focus from reducing consumption to increasing production. Policies should aim to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction. “

The study highlights the unusually difficult situation in which central banks are currently battling inflation. Some historical indicators of a global recession are already warning. The global economy is now facing its sharpest slowdown, following its post-recession recovery since 1970. Global consumer confidence has fallen much sharper than in the run-up to previous global recessions. The world’s three largest economies, the United States, China and the eurozone, are slowing sharply. Under these circumstances, even a modest blow to the global economy next year could plunge us into recession.

Building on insights from previous global recessions, the study analyzes the recent evolution of economic activity and presents scenarios for 2022-24. A slowdown such as the one currently underway usually requires counter-cyclical policies to support the economy. However, the threat of inflation and limited fiscal space are causing policymakers in many countries to withdraw policy support, even as the global economy slows sharply.

The experience of the 1970s, the policy response to the global recession of 1975, the period of stagflation that followed, and the global recession of 1982 showed that inflation remained high for a long period of time while growth was weak. indicates the risk of The 1982 global recession coincided with his second-lowest economic growth in the developing world in the last 50 years, and her second-lowest after 2020. This triggered her 40-plus debt crisis, and the ensuing decade of lost growth in many developing countries.

“The recent tightening of monetary and fiscal policy is likely to help contain inflation.” Said Ayhan Kose, Acting Vice President of the World Bank for equitable growth, finance and institutions“However, they are highly synchronized across countries, which could lead to mutual complications leading to tighter financial conditions and an accelerating slowdown in global growth. Policies in emerging market and developing economies. Planners need to be prepared to manage the potential spillovers from concurrent policy tightening globally.”

Central Bank Efforts to curb inflation must continue, and can be done without impacting a global recession, the study finds. But it will require concerted action by various policy makers.

  • Central Bank Policy decisions must be clearly communicated while preserving independence. This could help anchor inflation expectations and reduce the degree of tightening needed. In advanced economies, central banks should be mindful of the cross-border spillovers of monetary tightening. Emerging market and developing economies need to strengthen macroprudential regulation and build foreign exchange reserves.
  • fiscal authority The withdrawal of fiscal support measures should be carefully coordinated while ensuring consistency with monetary policy objectives. Next year, the proportion of countries tightening fiscal policy is expected to reach its highest level since the early 1990s. This could amplify the impact of monetary policy on growth.Policy makers also need to develop credible medium-term financial plans and provide targeted relief to vulnerable households..
  • Other economic policy makers In particular, we must join the fight against inflation by taking strong steps to boost global supply. These include:

o Easing labor market constraintsPolicy measures should help boost labor force participation and lower price pressures. Labor market policies can facilitate the relocation of displaced workers.

o Strengthen the global supply of commoditiesGlobal coordination can go a long way in increasing food and energy supplies. For energy commodities, policy makers need to accelerate the transition to low-carbon energy sources and put in place measures to reduce energy consumption.

o Strengthening the global trade networkPolicy makers need to work together to ease global supply bottlenecks. They need to support a rules-based international economic order that protects against threats of protectionism and fragmentation that could further disrupt trade networks.

Download the survey.

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