As per a comprehensive study by the World Bank, simultaneous hikes in interest rates by central banks across the world in response to inflation may result in a global recession in 2023 and may cause a series of financial crises in emerging markets and developing economies.
As per a comprehensive study by the World Bank, simultaneous hikes in interest rates by central banks across the world in response to inflation may result in a global recession in 2023 and may cause a series of financial crises in emerging markets and developing economies.
There are already many signs of a global slowdown. The British Broadcasting Corporation (BBC) reported that the central banks have raised rates with a degree of synchronicity that has never been witnessed over the past five decades to tackle rising prices. Reports also state that this is likely to continue next year.
The growing rates make borrowing more expensive to try to bring down the pace of price rises. However, it makes loans more costly, which may result in slow economic growth.
The study finds that the interest rate hike could leave the global inflation rate at about 5 percent in 2023, which is nearly double the five-year average before the pandemic, unless supply disruptions and labor-market pressures abate. The current trajectory of interest-rate increases and other policy actions may not be sufficient to return global inflation to pre-pandemic levels.
In a statement, World Bank President David Malpass said that he is concerned that these trends will continue, leaving long-lasting consequences that are disastrous for people in developing economies and emerging markets.
In a statement after the release of the report on Thursday, World Bank President David Malpass said that he is concerned that these trends will continue, leaving long-lasting consequences that are disastrous for people in developing economies and emerging markets.
The World Bank President further highlighted that policymakers could shift their focus to boosting consumption rather than reducing consumption to achieve low inflation rates, currency stability, and faster growth. He added that policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.
The World Bank’s warning came ahead of the US Federal Reserve and Bank of England’s monetary policy meetings, both of which are expected to increase key interest rates next week.
The study emphasizes the highly complicated circumstances in which central banks are currently fighting inflation. A number of past global recession indicators are already flashing warnings. Since 1970, the global economy has slowed down significantly.
The world’s largest economies—the United States, the European Union, and China—have been slowing sharply, and under these conditions, even a minor hit to the global economy over the next year could tip it into recession.
The world’s largest economies—the United States, the European Union, and China—have been slowing sharply, and under these conditions, even a minor hit to the global economy over the next year could tip it into recession.
The study analyses the recent evolution of economic activity using insights from previous global recessions and presents scenarios for 2022–24. A slowdown, similar to the one that is currently underway, typically necessitates a countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are prompting policymakers in many countries to withdraw policy support even as the global economy slows dramatically.
The 1970s experience, including policy responses to the 1975 global recession, the subsequent period of stagflation, and the 1982 global recession, demonstrates the risk of allowing inflation to remain elevated for an extended period while growth is weak. The 1982 global recession was followed by the second-lowest growth rate in developing economies over the previous five decades, second only to 2020. It resulted in more than 40 debt crises and a decade of lost growth in many developing economies.
The Russia-Ukraine war, which has decreased food supplies; the pandemic’s effects on supply chains; poor demand as a result of China’s ongoing COVID-19 lockdowns; and extreme weather that has increased agricultural forecasts are just a few of the reasons why the world is experiencing record inflation.
The Reserve Bank of India (RBI) raised the repo rate for the third time in August, to 5.40%. 5.0 is the base score. The RBI maintained its inflation forecast for 2022-23 at 6.7% while predicting 7.2% real inflation-adjusted GDP growth.
edited and proofread by nikita sharma
