More than a dozen countries have rushed to raise interest rates in recent months, but World Bank experts now fear that could mean a looming global recession.
While back-to-back interest rate hikes have helped control inflation, a recent World Bank report showed that such a series of rate hikes could push the world into a recession in 2023, largely at because of the degree of synchronicity not seen in the past five decades.
Higher interest rates have been a traditional tool for controlling inflation – a balancing act that makes borrowing more expensive, dampens consumer demand and weighs on business expansion. This cools an overheated economy by reducing household purchasing power.
But such synchronized efforts by most central banks could have a domino effect on developing economies.
World Bank experts have said emerging markets and developing countries could experience a series of financial crises, causing long-term damage to the global economy.
According to Ayhan Kose, the World Bank’s acting vice president for inclusive growth, finance and institutions, tighter monetary and fiscal policies will help reduce inflation. “But because they are very synchronous across countries, they could worsen each other by tightening financial conditions and accentuating the slowdown in global growth,” he said in the report.
World Bank experts warn that central banks in advanced countries should remain aware that their monetary tightening (when they get domestic inflation under control) can have cross-border spillovers, especially in emerging and developing economies.
The report uses past global recessions (1975, 1982, 1991, 2009 and 2020) to illustrate the impact of central bank policy responses on developing economies.
The study showed that the policies adopted during the global recessions of 1975 and 1982 are particularly relevant today.
For example, the 1982 global recession coincided with the second lowest growth rate of developing economies in the past five decades, second only to 2020. This triggered more than 40 debt crises in many countries. developing countries, followed by a decade of lost growth in these economies. .
If previous global recessions are any guide, World Bank experts say there are two big concerns.
First, given the current weak growth outlook, even a moderate negative shock could push the global economy into a recession. Based on this finding, every global recession since 1970 has been preceded by a year of relatively weak global growth. It has also led to a drop in consumer confidence in the past. Growth projections for 2022 and 2023 have also been revised down for most countries — 90% for advanced economies and 80% for emerging economies and developing countries.
Second, the recent slowdown in global GDP growth reflects sharp declines in growth in several major economies such as the United States, where growth slowed to 0.9% in the second consecutive quarter of 2022. Moreover, all Previous global recessions have coincided with sharp slowdowns in the United States The report showed a high likelihood of a major global slowdown, if the United States, the world’s largest economy, falls into recession.
In June of this year. US President Joe Biden has ignored any signs of the country sliding into a recession. But the report says the rising cost of borrowing and a sharp slowdown in the United States and other major economies could “trigger an acute financial crisis” in emerging economies and developing countries.
World Bank experts believe that global coordination with clear communication from central banks on their policies can help ensure global growth. Although inflation is slowing in some countries, including Canada, supply disruption remains a major concern.
The food supply continues to be disrupted by multiple factors, from extreme weather and rising input costs to Russia’s invasion of Ukraine. The World Bank report showed that until these supply disruptions and labor market pressures ease, interest rate hikes could leave global core inflation at 5%, double the five-year average before the pandemic.
Strong action was needed to ease labor market constraints, boost commodity supply and ease global supply bottlenecks, the report said, and this can be done through global coordination.
“To achieve low inflation rates, monetary stability and faster growth, policymakers could shift their focus from reducing consumption to increasing production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are essential for growth and poverty reduction,” World Bank President David Malpass said in the report.
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