Global inflation rose at the fastest pace in decades, driven by supply constraints amid strong demand as countries emerged from the pandemic, and exacerbated this year by the Russian invasion of the Ukraine and China’s Covid lockdowns.
Major central banks reacted forcefully, raising borrowing costs to calm demand and stifle runaway inflation.
But in a new paper, World Bank economists have warned that equities may not be enough to rein in high prices, necessitating more interest rate hikes.
Many countries will not be able to avoid a recession, but the global slowdown and tighter monetary policy “could lead to significant financial stress and trigger a global recession in 2023”, according to the newspaper.
In this scenario, global GDP growth would slow to 0.5% in 2023, a 0.4% contraction in per capita growth, meeting the technical definition of a global recession.
“Global growth is slowing sharply, with further slowing likely as more countries enter recession,” World Bank President David Malpass said in a statement. “My deep concern is that these trends persist, with lasting consequences that are devastating for people in emerging markets and developing economies.”
He urged policy makers to “shift their focus from reducing consumption to increasing production”.
In early June, the World Bank lowered its global growth forecast to 2.9%, more than a point lower than the January estimate.
The worst-case scenario outlined in Thursday’s paper would involve a recession in advanced economies and a sharp decline in growth in emerging and developing economies.
“The global economy is currently experiencing its biggest slowdown after a post-recession recovery since 1970,” the World Bank said.
“Under these circumstances, even a moderate hit to the global economy over the next year could tip it into recession.”