A Global Recession Is One of the Three Scenarios Envisaged by the World Bank for 2023.
David Malpass explains that the probability of this scenario occurring is far from zero.
Everyone has been talking about it and fearing it for months. I'm talking about a widespread global recession. “Global growth is slowing sharply, and a further slowdown is likely as more countries enter a recession. My deep concern is that these trends will continue,” comments World Bank President David Malpass, on the occasion of the September 15, 2022 release of a report on the subject.
Malpass' fear stems from the fact that central banks around the world have engaged in a coordinated policy of raising interest rates to counter the resurgence of inflation caused by the pandemic and the war in Ukraine.
The global economy is “in the midst of one of the most synchronized episodes of monetary and fiscal policy tightening at the international level in the past five decades,” the Bank notes. While monetary policy actions are necessary to contain inflationary pressures, the consequences could be a further slowdown in growth.
Restrictive monetary policies
In the Bank's view, interest rate increases and policies to curb price increases may not be sufficient to bring inflation back to its pre-COVID level. Investors expect central banks to raise global policy rates to nearly 4% by 2023. That's more than 2 percentage points from the 2021 average.
“Unless supply disruptions and labor market pressures abate, these interest rate hikes could leave the global inflation rate, excluding energy, at about 5% in 2023, nearly double the five-year average before the pandemic,” the World Bank study said.
To bring inflation back to the target set by international monetary authorities, an additional 2 percentage point increase may be required. The likely result: global GDP growth would slow to 0.5% in 2023, which technically corresponds to a global recession.
Three scenarios
In their forecast, the economists of the multilateral institution have developed three hypotheses. The first, which seems the most likely today, is based on the idea that the current monetary tightening will not be sufficient to restore low inflation.
The second hypothesis is that a sudden slowdown in growth will lead to a rise in inflation expectations and generate a more substantial monetary tightening at the same time. In this scenario, “the global economy would still escape a recession in 2023 but would experience a sharp slowdown without restoring low inflation.”
The third scenario is much more worrisome and its probability is far from zero. It leads to a global recession as early as next year, accompanied by destabilization of financial markets. The world economy would then suffer significant permanent losses in production compared to what was expected before the pandemic appeared. The growth prospects of emerging and developing countries would be severely affected.
According to the World Bank, the current synchronized tightening of monetary and fiscal policies resembles that which occurred before the 1982 recession. GDP per capita in industrialized countries fell by about 2% in that year, and GDP per capita in emerging and developing countries fell by 1.2%. This was followed by more than 40 debt crises and a decade of lost growth in many developing economies. This is the scenario that is likely to be repeated.
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