World Bank, based in Washington DC on Thursday said that the global economy is edging towards an economic recession as central banks across the globe are hiking interest rates to control the inflation rate.
Disruption in the global supply chain and increasing prices of essential commodities in international markets had triggered high inflation rates in major economies. To control the inflation rate and to bring inflation under the desired level, central banks are increasing benchmark interest rates.
World Bank believes that such an increase in interest rates will have severe impacts on the global economy. Low circulation of money in the economy and markets will lead to an economic slowdown.
The new study report which was released by World Bank states that the world’s largest economies, such as the United States of America, the European Union and China have been witnessing a slowdown in their economy. Even a moderate hit to the global economy will put pressure on the markets and cause a widespread slowdown in economies. Such an economic phenomenon will increase the chances of a recession.
The study states that the global economy is in worse condition than it was after the 1970 global economic slowdown. Recovery of the global economy from the negative impacts of COVID-19 and Russia Ukraine war is also slow.
David Malpass, President of World Bank said that the growth of the global economy is witnessing a sharp slowdown. He said that any further slowdown will push more countries into a likely recession. According to Malpass, such a situation would have devastating impacts on emerging markets and developing countries.
Central banks across the globe have already increased the benchmark interest rates by 2% on average during 2021. The study states that banks will have to increase the interest rates by an additional 2% to bring current inflation to normal levels.
Changes in monetary and fiscal policies are expected to continue in the following financial year as the impacts of the COVID-19 lockdown and the current geopolitical crisis will be a hard puzzle to solve for central banks.
The World Bank study states that a 2% additional increase in interest rate will result in a slowdown of gross domestic product growth to 0.5% in 2023. In per capita GDP terms, the slowdown will be posted at an estimated 0.4%.
Technically speaking, such a rate of economic slowdown in GDP growth rate can be termed a Recession.
The study by the World Bank also put forth a way in which central banks can combat inflation without triggering a global recession. Communication of policy decisions to the public in a very clear and precise manner is one of the most effective ways to combat the inflation rate.
Policymakers should also ensure that they have instituted medium-term fiscal plans which would help the financial institutions to provide targeted financial and economic aid to vulnerable sections of society.