As fears of a global recession looms, economists have called for urgent measures to curb inflation without exacerbating recession risk.
A new study by the World Bank has shown that 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.
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.
Investors expect central banks to raise global monetary-policy rates to almost 4% through 2023 — an increase of more than two percentage points over their 2021 average.
Unless supply disruptions and labour-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5% in 2023 — nearly double the five-year average before the pandemic.
After record expansion in 2021, this would cut short recovery well before economic activity has returned to its pre-pandemic trend.
To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional two percentage points, according to the report’s model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5% in 2023 — a 0.4% contraction in per-capita terms that would meet the technical definition of a global recession.
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. 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 Group 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.”
The study highlights the unusually fraught circumstances under which central banks are fighting inflation today. Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions.
The world’s three largest economies — the United States, China, and the euro area — have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.
The study relies on insights from previous global recessions to analyse the recent evolution of economic activity and presents scenarios for 2022-24. A slowdown — such that the one now underway — typically calls for countercyclical policy to support activity.
However, the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply.
The World Bank sees a way for central banks to continue their efforts to control inflation without triggering a global recession, and prescribed a five-point action plan for policy makers around the world.
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