WB, IMF warn of global recession in 2023

A global recession could be on the horizon in 2023, according to World Bank (WB) and International Monetary Fund (IMF).

The world may be edging toward a global recession as central banks across the world simultaneously hike interest rates to combat persistent inflation, the World Bank said on Thursday.

The world’s three largest economies - the United States, China, and the euro area - have been slowing sharply, and even a “moderate hit to the global economy over the next year could tip it into recession,” the bank said in a new study.

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession,” World Bank President David Malpass said, adding his worry that these trends would persist, with devastating consequences for emerging market and developing economies, reports Reuters.

Downside risks continue to dominate the global economic outlook and some countries are expected to slip into recession in 2023, but it is too early to say if there will be a widespread global recession, IMF spokesman Gerry Rice said on Thursday.

The IMF in July revised down global growth to 3.2 per cent in 2022 and 2.9 per cent in 2023. It will release a new outlook next month.

“We do expect some countries to face recession in ‘23. It’s too early to say whether that would be a widespread global recession,” Rice said.

Synchronized interest rate hikes under way globally and related policy actions were likely to continue well into next year, but might not be sufficient to bring inflation back down to levels seen before the Covid-19 pandemic, the WB said.

Unless supply disruptions and labour-market pressures subsided, the global core inflation rate, excluding energy, could stay at about 5 per cent in 2023, nearly double the five-year average before the pandemic.

To drive inflation lower, central banks may need to raise interest rates by an additional 2 percentage points, on top of the 2-percentage point increase already seen over the 2021 average, WB said.

But an increase of that size, along with financial-market stress, would slow global gross domestic product growth to 0.5 per cent in 2023, or a 0.4 per cent contraction in per–capita terms, which would meet the technical definition of a global recession, it added.

Malpass said policymakers should shift their focus from reducing consumption to boosting production, including efforts to generate additional investment and productivity gains.

Previous recessions showed the risk of allowing inflation to stay elevated for long while growth is weak, the bank said, noting that the 1982 recession triggered more than 40 debt crises and ushered in a decade of lost growth in many developing economies.

The study suggested that central banks could combat inflation without touching off a global recession by communicating their policy decisions clearly, while policymakers should put in place credible medium-term fiscal plans and continue to provide targeted relief to vulnerable households.