Interest rates

World Bank warns of rising recession risk amid higher interest rates

WASHINGTON (Reuters) – The threat of a global recession is growing as central banks focus on curbing soaring inflation rates, the World Bank warned on Thursday, calling on governments to help boost supply for reduce upward pressure on prices.

Inflation around the world rose at the fastest pace seen in decades, due to supply constraints amid strong demand as countries emerged from the pandemic. It has been exacerbated this year by the Russian invasion of Ukraine and the Covid lockdowns in China.

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 these actions may not be enough to rein in high prices, requiring further interest rate hikes, which would dampen growth.

Many countries will not be able to avoid a recession, but the global slowdown and tightening of monetary policy “could give rise to significant financial stress and trigger a global recession in 2023”, according to the document.

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.

Not all dark and dark

Indermit Gill, the newly installed chief economist at the Washington-based development lender, said his biggest concern is that due to the downturn and the pandemic crisis, “poverty reduction has stalled”. But he also expressed some optimism.

“It’s not a disaster story,” he told reporters, noting that thanks to the work done to improve economic policies and management before the pandemic, countries are better able to protect the poor.

“I have a feeling we’ll come out on the right side because the world has changed now and you know there’s a lot more capacity around,” he said.

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. “

Posted in Dawn, September 16, 2022