World Bank said the global economy is now in its steepest slowdown following a post-recession recovery since 1970
The world could face a recession next year amid simultaneous tightening of monetary policy by central banks around the world, the World Bank has said in a new report that called for boosting production and removing supply bottlenecks to ease inflation.
Several indicators of global recessions are already “flashing signs”, the report said. The global economy is now in its steepest slowdown following a post-recession recovery since 1970, it added.
Global interest rate hikes by central banks could reach 4%, double that in 2021, just to keep core inflation — which strips out volatile items such as food and fuel — at 5% levels, the bank said.
From the US to Europe and India, countries are aggressively raising lending rates, which aim to curb the supply of cheap money and thereby help bring down inflation. But such monetary tightening has costs. It dampens investment, costs jobs, and suppresses growth, a trade-off faced by most nations, including India.
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” World Bank president David Malpass said in a statement after the report was released on Thursday.
The world is facing record inflation due to factors including the Ukraine war that has dwindled food supplies, knock-on effects of the pandemic on supply chains, poor demand in China due to its persistent Covid lockdowns, and extreme weather that has upended forecasts of agricultural output.
The Reserve Bank of India (RBI) announced a third repo rate hike to 5.40% in August, up 50 basis points. A basis point is one-hundredth of a percentage point. The RBI maintained its inflation estimate at 6.7% for 2022-23 while forecasting real (inflation-adjusted) GDP growth at 7.2%.
India’s retail inflation rose 7% in August on the back of higher food prices, compared to a 6.71% rise in July, according to official data. Consumer inflation has remained above the central bank’s limit of 4% (+/-2%) for the eighth straight month.
The latest World Bank report underlines that merely raising interest rates may not be adequate to cool inflation emanating from supply constraints and countries should focus on boosting the availability of goods.
“Policymakers could shift their focus from reducing consumption to boosting production,” Malpass said in the statement, which highlighted downturn fears based on a report by World Bank economists Justin-Damien Guenette, M Ayhan Kose, and Naotaka Sugawara. The report said central banks ought to continue efforts to stamp out inflation without triggering a global recession.