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.
Policy makers 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.
“Policy makers 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 policy makers:
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. Policy makers need to put in place credible medium-term fiscal plans and provide targeted relief to vulnerable households
Other economic policy makers need to join the fight against inflation by taking strong steps to boost global supply
(With assistance from Zoe Schneeweiss)
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