Risk of global recession in 2023 rises amid rate hikes, World Bank

As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, according to a comprehensive new study by the World Bank The World Bank study estimates 2023 global gross domestic product growth to slow to 0.5 per cent, and contract 0.4 per cent in per capita terms that would meet the technical definition of a global recession. After record expansion in 2021, this would cut short recovery well before economic activity has returned to its pre-pandemic trend, it said.

“Policy makers could shift their focus from reducing consumption to boosting production,” said World Bank Group President David Malpass. “Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”  From the US to Europe and India, countries are aggressively raising lending rates, which aim to curb the supply of cheap money and thereby help bring down inflation. But such monetary tightening has costs. It dampens investment, costs jobs, and suppresses growth, a trade-off faced by most nations, including India.

The world is facing record inflation due to factors including the Ukraine war that has dwindled food supplies, knock-on effects of the pandemic on supply chains, poor demand in China due to its persistent Covid lockdowns, and extreme weather that has upended forecasts of agricultural output. The study by World Bank economists Justin-Damien Guenette, M. Ayhan Kose, and Naotaka Sugawara sees a way for central banks to continue their efforts to control inflation without triggering a global recession, and prescribed an action plan for policy makers: The report underlines that merely raising interest rates may not be adequate to cool inflation emanating from supply constraints and countries should focus on boosting the availability of goods.