The World Bank has raised the specter of a global recession as central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades—a trend that is likely to continue well into next year.
Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic, according to a World Bank study.
To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, according to the World Bank report’s model. If this were accompanied by financial market stress, global gross domestic product growth would slow to 0.5 percent in 2023—a 0.4 percent contraction in per capita terms that would meet the technical definition of a global recession.
“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,” said World Bank Group President David Malpass.“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.”
The study highlights the unusually fraught circumstances under which central banks are currently fighting inflation. Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. The world’s largest economies—the US, China, and the European Union—have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession, according to the report.
The study used insights from previous global recessions to analyze the recent evolution of economic activity. A slowdown—such the one now underway —typically calls for countercyclical policy to support activity. The World Bank said the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply.
The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak, the report said.
“Recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation,” said Ayhan Kose, the World Bank’s Acting Vice President for Equitable Growth, Finance, and Institutions. “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.”
Like most economies weighed down by high oil prices and spiraling inflation, the Philippines is facing economic challenges exacerbated by its heavy reliance on imported oil and food products. The peso’s slump to a record low further aggravates the situation.
In an interview with Bloomberg in New York, President Marcos said the country can’t afford to be complacent in relying on traditional suppliers. He disclosed that the government is talking to Russia about buying fuel and other key commodities.
“The political side of it has been a little tricky, but nonetheless, the national interest comes first,” he said when asked about US-led sanctions against Russia over its invasion of Ukraine. “We need to find those new sources of cheaper fuel. But that applies not only to fuel, it applies to things like feed, fertilizer, other inputs that are just critical for us.”
We commend the President for this brave if complicated decision that may cause problems for his administration. But he has to bite the bullet, so to speak. The government needs to temper rising prices, which can drive millions of Filipinos into poverty.
