World Bank warns of rising global recession risk amid simultaneous rate hikes

As central banks across the world are simultaneously hiking interest rates in response to inflation, the world may be edging toward a global recession in 2023, the World Bank warned.

Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades. a trend that is likely to continue well into next year, the global lender said in a new study.

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, Xinhua news agency reported citing the study as saying.

Investors expect central banks to raise global monetary policy rates to almost 4 percent through 2023, an increase of more than 2 percentage points over their 2021 average, it said.

“If this were accompanied by financial-market stress, global GDP (gross domestic product) growth would slow to 0.5 per cent in 2023, a 0.4 percent contraction in per-capita terms that would meet the technical definition of a global recession,” the study noted.

Ayhan Kose, the World Bank’s acting vice president for Equitable Growth, Finance, and Institutions, noted that because the rate hikes are highly synchronous across countries, they could be “mutually compounding” in tightening financial conditions and steepening the global growth slowdown.

“Policymakers in emerging market and developing economies need to stand ready to manage the potential spillovers from globally synchronous tightening of policies,” said Kose.

A string of financial crises in emerging market and developing economies that would do them lasting harm, according to the study.

“My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” said World Bank President David Malpass.

“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production.

“Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction,” he added.

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