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: