The global economy may face a recession next year caused by an aggressive wave of policy tightening that could yet prove inadequate to temper inflation, the World Bank said in a new report.
Policymakers around the world are rolling back monetary and fiscal support at a degree of synchronization not seen in half a century, according to the study released in Washington on Thursday. That sets off larger-than-envisioned impacts in sapping financial conditions and deepening the global growth slowdown, it said.
Investors expect central banks to raise global monetary policy rates to almost 4% next year, double the average in 2021, just to keep core inflation at the 5% level. Rates could go as high as 6% if central banks look to wrangle inflation within their target bands, according to the report¡¯s model.
The World Bank study estimates 2023 global gross domestic product growth to slow to 0.5%, and contract 0.4% 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.
¡°Policymakers 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.¡±
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 policymakers:
- Central banks must communicate policy decisions clearly to help anchor inflation expectations and reduce the degree of tightening needed.
- Advanced-economy central banks should keep in mind the cross-border spillover effects of tightening, while authorities in emerging markets should strengthen macro-prudential regulations and build foreign-exchange reserves.
- Fiscal authorities need to carefully calibrate the withdrawal of support measures while ensuring consistency with monetary-policy objectives.
- The number of countries tightening fiscal policies next year is expected to reach its highest level since the early 1990s, amplifying the effects of monetary policy on growth.
- Policymakers need to put in place credible medium-term fiscal plans and provide targeted relief to vulnerable households.
- Other economic policymakers need to join the fight against inflation by taking strong steps to boost global supply.
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