the Global economy faces a growing threat of recession next year as central banks around the world raise interest rates at an aggressive pace in a bid to rein in inflation, the World Bank said in a new report.
Growth in the world’s three largest economies, the United States, China and the European Union, has already slowed sharply this year, the Washington-based institution said.
He warned that even a “moderate hit” to the global economy over the next year could drag it into a recession.
“Global growth is slowing dramatically, and it is likely to slow further as more countries slip into recession,” said World Bank Group President David Malpass. “My deep concern is that these trends will persist, with lasting consequences that will be devastating for people in emerging markets and developing economies.”
The World Bank noted that the ongoing synchronized interest rate increases globally are likely to continue well into next year, but may not be enough to bring inflation down to pre-pandemic levels.
In the USA, Federal Reserve Policymakers they have raised the benchmark interest rate four times in a row and are poised to approve another large rate hike next week. The central banks of England and the European Union have also raised rates.
Jerome Powell, Chairman of the Federal Reserve he has signaled that officials will continue to raise rates, even if unemployment rises and shakes markets.
Investors expect central banks to raise interest rates to nearly 4% next year, though rates could eventually rise as high as 6%, the report showed.
But unless supply chain disruptions dissipate and labor market pressures ease, the underlying global inflation rate, which excludes the most volatile measure of energy, will likely hover around 5% in 2022, the World Bank said. That’s nearly double the pre-pandemic average.
The study estimated that 2023 global gross domestic product, the broadest measure of goods and services produced in a country, will slow to 0.5% after a record expansion last year. That would meet most definitions of a technical recession because average global income would be falling.
“Policymakers could shift their focus from reducing consumption to boosting production,” Malpass said. “Policies should seek to generate additional investment and improve productivity and capital allocation, which are essential for growth and poverty reduction.”
The World Bank encouraged central bankers to clearly communicate their political actions, suggesting that doing so could help them avoid a recession.