The increase in interest rates of central banks simultaneously became the cause. Interest rates were raised to combat persistently soaring inflation.
“The world’s three largest economies – the United States, China, and the European region – have slowed sharply,” he wrote in a new study.
“Even a moderate hit to the global economy over the next year could push it into a recession,” the World Bank added.
In detail, the World Bank sees interest rate hikes will continue until next year. But that, it is believed, will not be enough to bring inflation back to pre-Covid-19 levels.
If supply disruptions and labor market pressures ease, the global core inflation rate (excluding energy) will remain at around 5% in 2023. Even then, it’s still nearly double the five-year average before the pandemic.
The World Bank said to push inflation lower, the central bank may need to raise interest rates by an additional 2 percentage points. This is on top of the 2-point increase already seen above the 2021 average.
But an increase of that magnitude, together with financial market pressures, would slow global gross domestic product (GDP) growth. Where in 2023, world GDP will be 0.5%.
There will be a 0.4% contraction. According to the World Bank, this would meet the technical definition of a global recession.
The study suggests central banks be able to communicate their policy decisions clearly. Meanwhile, policymakers must implement a credible medium-term fiscal plan and continue to provide targeted assistance to vulnerable households.
This situation is believed to be very disturbing to emerge markets and developing countries. The statement was confirmed by the President of the World Bank and his Deputy in the same report.
“Global growth is slowing sharply, with the possibility of a further slowdown as more countries fall into recession,” said World Bank President David Malpass.
“This trend will persist, with devastating consequences for emerging markets and developing economies.”
“Policymakers in emerging market and developing countries must be prepared to manage the potential impact of global policy tightening syndrome,” said World Bank Vice President for Growth, Finance and Equity Industries, Ayhan Kose.
Earlier in July, the IMF also gave an unsavory forecast about the global economy. Where the world economy will only grow 3.2% in 2022 and 2.9% in 2023.