The impending economic retardation, the World Bank said, would be brought about as Central Banks concurrently raise interest rates in their quest to halt persistent inflation.
According to the Bretton Woods institution, in 2022, the threat of a global recession had increasingly haunted policymakers as they have seen rapid deterioration of growth prospects amid rising inflation.
“In 2023, the global economy would experience a recession similar in magnitude to the one in 1982, with growth slowing to 0.5 per cent,” the Bank said in its September 2022 Equitable Growth, Finance, and Institutions Policy Notes (EFI Policy Notes).
It explained that Central Banks had to raise interest rates by an added two percentage points, on top of the two-percentage point increase already seen over the 2021 average to drive inflation lower.
The Banks, however, noted that an increase of that size, along with financial market stress, would slow global Gross Domestic Product (GDP) growth to 0.5 per cent in 2023, or a 0.4 per cent contraction in per capita terms, which would meet the technical definition of a global recession.
Therefore, “the potential for abrupt policy shifts in major economies to lead to acute global financial stress is clear in the historical record of global recessions,” the report noted.
Commenting on the report, Mr David Robert 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.” Mr Malpass echoed.
The World Bank Group President asked policymakers to shift focus from reducing consumption to boosting production “to achieve low inflation rates, currency stability and faster growth.”
He recommended that: “Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
The report noted that global short-term rates would surge as a result, rising 560 basis points from 2021 to 2023 – an increase roughly comparable to the 440-basis point rise that took place between 1980 and 1982.
It also said that the macroeconomic effects of sharply deteriorating global financial conditions, as well as weaker confidence, would compound the headwinds from globally synchronous policy tightening.
“As a result, this scenario would imply that global GDP growth would be reduced by 1.9 percentage points in 2023 and one percentage point in 2024, relative to the baseline,” the report noted.
The world economy has experienced four global recessions over the past seven decades – in 1975, 1982, 1991, and 2009, during which annual real per capita global output contracted, accompanied by weakening of other key indicators of global economic activity.