World Bank warns of global recession in 2023
A man stands near a three-wheel motorcycle with cassava. Food prices have been rising since March this year due to rising inflation. pHOTO | EDGAR R. BATTE
What you need to know:
- Central Banks have been raising interest rates with a degree of synchronicity not seen over the past five decades—a trend that is likely to continue into next year.
- The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak.
The world is moving towards a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, a new study by the World Bank says.
The study reveals that 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 Bank study further points out that 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.
Unless supply disruptions and labour-market pressures subside, policy rates that have been hiked by the central banks around the world, could leave the global core inflation rate (excluding energy) at about 5 percent in 2023. This implies that the inflation rates nearly double the five-year average before the pandemic, the World Bank study finds.
The World Bank points out that to cut global inflation to a rate consistent with their targets, Central Banks may need to raise interest rates by an additional 2 percentage points, according to the report’s model.
The World Bank said if this were accompanied by financial-market stress, global GDP growth would slow to 0.5 percent in 2023—a 0.4 percent 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 markets and developing economies,” said World Bank Group President David Malpass.
Mr Malpass added: “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 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 underway—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 found out that the 1982 global recession coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020. It triggered more than 40 debt crises and was followed by a decade of lost growth in many economies.
In the Monetary Policy statement of August, the deputy Governor BoU Dr Michael Atingi-Ego said: “In the near term (12 months ahead), BoU forecasts that inflation pressure will continue to rise. While the current increases in the CBR are meant to bring back inflation to its medium term objective of 5 percent, these have had the indirect effect in lowering the depreciation of the exchange rate, which is expected to cushion the inflation pressure.”
