World Bank warns the world economy will fall into recession as central banks simultaneously raise interest rates

The World Bank estimates that global GDP growth will slow to 0.5% in 2023. GDP per capita could decline by 0.4% - meaning a technical recession in the global economy.

The world economy may fall into recession next year, as a wave of too strong monetary policy tightening stifles growth, although so far has not proved effective in combating inflation. That is the statement just made in the latest report of the World Bank World Bank.

The report released yesterday (September 15) said that policymakers around the world are simultaneously withdrawing fiscal and monetary support measures with a consensus not seen in 50 years. come back here. This has larger-than-expected impacts on financial markets and economic growth.

Investors expect central banks to raise the global average interest rate to nearly 4% next year, more than double from 2021 and just to keep core inflation at 5%. Interest rates can go up to 6% if central banks want to keep inflation within the set target range.

The World Bank estimates that global GDP growth will slow to 0.5% in 2023. GDP per capita could decline by 0.4% - meaning a technical recession in the global economy. After record growth in 2021, the recovery of the world economy was quickly cut off before economic activity could return to pre-epidemic levels.

“Policymakers can shift focus from reducing consumption to boosting production,” said World Bank President David Malpass. “Policies should aim to increase investment in productivity improvements and capital allocation efficiency, which are important for economic growth and poverty alleviation.”

Research by World Bank economists including Justin-Damien Guenette, M. Ayhan Kose, and Naotaka Sugawara also offers a number of ways central banks can continue to battle inflation without pushing the global economy. fall into recession.

First, central banks need to communicate clearly about their operating policies so that inflation expectations are not inflated, and at the same time reduce the degree of tightening of monetary policy.

Central banks of advanced economies should keep in mind that tight monetary policy always has a spillover effect. Meanwhile, emerging markets need to strengthen foreign exchange reserves and apply prudent macro management policies.

Countries must always be really cautious when withdrawing fiscal support measures, ensuring synchronization with monetary policy goals.

It is forecast that the number of countries tightening fiscal policy in 2023 will be at the highest level since the early 1990s, further amplifying the effects of monetary policy on economic growth. Therefore, policy makers need to come up with reasonable plans in the medium term and have policies to support vulnerable households.

Economies around the world need to work together in the fight against inflation by taking strong steps to boost supply globally.