World Bank warns higher interest rates could trigger global recession

September 21, 2022

In our Market insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.

World Bank Study says global economy is in steepest slowdown after a post-recession recovery since 1970.

The world may be edging towards another global recession as central banks simultaneously raise interest rates to combat persistent inflation, the World Bank has warned once more.

The three largest economies, – the US, China and the eurozone – have been slowing sharply, and even a “moderate hit to the global economy over the next year could tip it into recession.”

The global economy is now currently in its steepest slowdown after a post-recession recovery since 1970, and consumer confidence had already dropped more sharply than in the run-up to previous global recessions seen before.

Synchronised interest rate increases under way globally and related policy actions are likely to continue well into next year but may not be sufficient to bring inflation back down to levels seen before the Covid-19 pandemic.

Unless supply disruptions and labour-market pressures are subsided, the global core inflation rate, excluding energy, could stay at about 5% in 2023, almost double the five-year average before the pandemic.

To drive inflation lower, central banks may need to raise interest rates by an additional two percentage points, on top of the two-percentage point increase already seen over the 2021 average.

However, an increase of that size, along with financial market stress, would slow global gross domestic product growth to 0.5% in 2023, or a 0.4% contraction in per capita terms, which would therefore meet the technical definition of a recognised global recession.

Previous recessions showed the risk of allowing inflation to stay elevated for long while growth is a weak approach, and this was evident in the 1982 recession which triggered more than 40 debt crises and ushered in a decade of lost growth in many developing economies.

The in-depth study suggested that central banks could combat inflation without triggering a global recession by communicating their policy decisions clearly, whilst policymakers should put in place credible medium-term fiscal plans and continue to provide targeted relief to vulnerable households.

All Insight Articles >Contact Us >

Latest Insight