The World Bank has issued a warning to central banks, suggesting the current trajectory of interest rate hikes may not be sufficient to avoid a global recession in 2023.
A new study from the organisation found that unless supply disruptions and labour-market pressures subside, the expected interest rate increases could leave global core inflation at 5%, almost double the pre-pandemic five-year average.
While investors expect central banks to raise rates to almost 4% next year - a figure more than two percentage points higher than 2021's average - the World Bank predicts that rates might need to jump an additional two percentage points to reach inflation targets.
Goldman Sachs forecasts UK recession to last until 2024
If this were met with a financial market stress, global GDP growth would slow to 0.5%, a contraction that meets the technical definition of a global recession.
An unusual confluence of factors makes the global economy particularly vulnerable and with the US, China and eurozone already slowing sharply, even a moderate slowdown could tip the world into recession.
Acting vice president of the World Bank Ayhan Kose said that while the recent monetary and fiscal tightening policies would likely help reduce inflation, the "highly synchronous" policies could be "mutually compounding in tightening financial conditions and steepening the global growth slowdown".
"Policymakers in emerging market and developing economies need to stand ready to manage the potential spillovers from globally synchronous tightening of policies," he added.
David Malpass, World Bank Group president, was particularly concerned about the impact on emerging markets.
"My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies," he warned.
"To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production.
"Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction."
Recession or not growth is slowing
However, the World Bank believes inflation can be controlled without causing a global recession, but this would require "concerted action by a variety of policymakers".
Recommendations include central banks communicating policy decisions clearly and safeguarding their independence, while those in advanced economies should be aware of the cross-border impact of monetary tightening, and those in emerging and developing markets should strengthen macroprudential regulations and build foreign exchange reserves.
Policies should be introduced to support labour force participation and reduce price pressures, while global coordination is encouraged to increase food and energy supplies. An acceleration of the transition to low-carbon energy should also be implemented.
