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World Bank to CBN, others: watch out for global recession

Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about five per cent in 2023—nearly double the five-year average before the pandemic, the study finds. 

The World Bank Group yesterday warned the Central Bank of Nigeria (CBN), and other central banks across the world on the possibility of global economic recession following simultaneous hike of interest rates.

The CBN had at the last Monetary Policy Committee (MPC) meeting in July in Abuja raised the benchmark interest rate from 13.5 per cent to 14 per cent.

In a report tilted: Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes, World Bank Group President David Malpass, said that central banks’ simultaneous hike of interest rates in response to inflation, will push the world economies toward a global recession in 2023.

The decision would also lead to a string of financial crises in emerging market and developing economies that would do them lasting harm, according to a comprehensive new study by the World Bank.

The study relies on insights from previous global recessions to analyze the recent evolution of economic activity and presents scenarios for 2022 to 24.

The report said 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.

“Yet the currently expected trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic. Investors expect central banks to raise global monetary-policy rates to almost four percent through 2023—an increase of more than two percentage points over their 2021 average,” it said.

Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about five per cent in 2023—nearly double the five-year average before the pandemic, the study finds.

It explained that to cut global inflation to a rate consistent with central banks’ targets, the apex banks may need to raise interest rates by an additional two percentage points.

“If this were accompanied by financial-market stress, global Gross Domestic Product (GDP) growth would slow to 0.5 percent in 2023—a 0.4 per cent contraction in per–capita terms that would meet the technical definition of a global recession,” it added.

“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,”  Malpass added.

“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.”

“Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. The world’s three largest economies—the United States, China, and the euro area—have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession,” it said.

World Bank’s Acting Vice President for Equitable Growth, Finance, and Institutions, Ayhan Kose, 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,” he said.

He advised central banks should persist in their efforts to control inflation—and it can be done without touching off a global recession, the study finds.

“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. In emerging market and developing economies, they should strengthen macro-prudential regulations and build foreign-exchange reserves.”

He added that fiscal authorities will need to carefully calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy objectives.
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