Despite the steps being taken by central banks in various countries, the expected trajectory of interest rates and other actions may not be enough to push inflation to pre-pandemic levels, according to a study released this week by the World Bank.
The study also said that emerging markets and developing economies could be facing financial crises in the near future that would cause long-term economic damage.
Supply problems
With central banks expected to continue their spate of rate increases in the hope of taming inflation, those higher lending costs could push the global core inflation rate (not including energy) to around five per cent next year unless supply problems ease and labour troubles fade.
That’s almost twice what it was before the Covid-19 outbreak.
The investor view
Investors expect central bank rates to climb toward four per cent through 2023, an uplift of more than two percentage points over the average rates last year, in a bid to reach their targets.
If this happens alongside stress in the financial markets, growth on the world’s gross domestic product (GDP) would slow to 0.5 per cent next year — a contraction of 0.4 per cent in per capita terms that is technically a global recession, according to the study’s models.
‘Devastating consequences’
David Malpass, World Bank group president, 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 markets 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.”
Warning signs
The World Bank, an international banking organisation based in Washington, referred to “the unusually fraught circumstances under which central banks are fighting inflation today,” and said that “several historical indicators of global recessions are already flashing warnings.”
The world economy “is now in its steepest slowdown following a post-recession recovery since 1970” with consumer confidence in sharp decline.
The Big Three — the United States, China, and the euro zone — have been slowing so much that “even a moderate hit to the global economy over the next year could tip it into recession”, the study said.
Slower growth
Looking at past global recessions, the bank pointed to 1975 and stagflation, then 1982 when long-term high inflation combined with slow growth and dozens of debt crises around the world.
Ayhan Kose, the World Bank’s acting vice president for equitable growth, finance and institutions, commented: “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.”
Recommendations
The study concluded that central banks should continue trying to stem inflation but without setting off a global recession. Among its recommendations:
- Central banks should clearly communicate policy decisions while protecting their independence.
- Fiscal authorities need to carefully weigh the withdrawal of any support measures while policymakers provide targeted relief to vulnerable households.
- Others in charge of economic policy must help to loosen bottlenecks in supply and to bolster global trade networks, among other steps.
