The World Bank (WB) has warned the global leaders of a possible recession in 2023 as the world economy has tightened fiscal and monetary policies with a poor growth forecast.
"As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies (EMDEs) that would do them lasting harm," said a comprehensive WB study.
The EMDEs like Bangladesh that were already hit hard by the pandemic-induced 2020 global recession could face a further economic hurdle in the coming years, it added.
The Washington-based lender observed this in a report styled 'Is a Global Recession Imminent?' on Friday.
As growth forecasts for the USA and other major economies have been downgraded for 2023, the risk of a global recession in 2023 has risen, the report cited.
Amid a substantial increase in the cost of borrowing, a sharp slowdown in the USA and other major economies could trigger acute financial stress in EMDEs, resulting in a significant deterioration in EMDE and global growth.
According to the WB data, the three economies -- the USA, euro area and China -- on average accounted for about 55 per cent of global GDP and 62 per cent of global growth over the 2015-19 period.
In addition, central banks globally have hiked interest rates by 2.0 percentage points on average to combat persistent inflation, the WB report said.
After a historic collapse in global GDP during 2020, it said, global growth surged to 5.7 per cent in 2021 -- its strongest post-global recession pace in 50 years.
"Although it is normal for the global economy to slow after last year's record growth, the expected steepness of the slowdown is highly unusual: the projected global growth path over 2021-23 constitutes the steepest decline in growth following an initial rebound from global recession since 1970."
"Between 2021 and 2023, global growth is projected to slow by 3.4 percentage points, cutting short the recovery from the pandemic recession in its second year, well before activity has returned to its pre-pandemic trend," added the report.
"These downgrades in growth forecasts do not imply that a global recession will take place in 2022 and 2023. Indeed, compared to the periods preceding past global recessions, consensus forecast downgrades for 2022 (and 2023) have been relatively small."
"However, these forecasts imply that the world economy is set to experience weaker growth next year than it is this year. But if previous global recessions are a guide, there are still at least two reasons to be concerned about the risk of a global recession in the near term," stated the report.
It said the macroeconomic effects of sharply deteriorating global financial conditions, as well as weaker confidence, would compound the headwinds from globally synchronous policy tightening.
As a result, this scenario would imply that global GDP growth would be reduced by 1.9 percentage points in 2023 and 1.0 percentage point in 2024, relative to the baseline, it added.
"In 2023, the global economy would experience a recession similar in magnitude to the one in 1982, with growth slowing to 0.5 per cent. In per capita growth terms, the 0.4 per cent contraction would be in line with the 1991 recession but would be milder than the 1982 episode because population grew faster in 1982."
Meanwhile, World Bank Group president David Malpass said: "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."
"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."
Ayhan Kose, WB's acting vice-president for equitable growth, finance, and institutions, said: "Recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation."
"But because they are highly synchronous across countries, they 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."
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