Coordinated policymaking needed to avoid a global economic recession

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 markets and developing economies, according to the report "Is a Global Recession Imminent", a comprehensive new study by the World Bank.

The current trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to the levels seen before the pandemic.

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, the study concludes. 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 report's model.

If this were accompanied by financial-market stress, global GDP 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. To prevent that from happening, the central banks of the major economies should persist in their efforts to control inflation, which the study indicates can be done without triggering a global recession. But it will require concerted action by a variety of policymakers.

The central banks must communicate policy decisions clearly while safeguarding their independence. This could help anchor inflation expectations and reduce the degree of tightening needed. In advanced economies, central banks should keep in mind the cross-border spillover effects of monetary tightening. Emerging market and developing economies, meanwhile, should strengthen their macroprudential regulations and build up their foreign-exchange reserves.

The fiscal authorities will need to carefully calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy objectives. The number of countries tightening their fiscal policies next year is expected to reach the highest level since the early 1990s. This could amplify the effects of monetary policy on growth. Policymakers should also put in place credible medium-term fiscal plans and provide targeted relief to vulnerable households.

And other economic policymakers will need to join in the fight against inflation-particularly by taking strong steps to boost global supply, which should include easing labor-market constraints, boosting the global supply of commodities, and strengthening global trade networks. Policymakers should cooperate to alleviate global supply bottlenecks. They should support a rules-based international economic order, one that guards against the threat of protectionism and fragmentation that could further disrupt trade networks.