Global Recession Might Be Around the Corner: World Bank

Many countries are facing the “ghost” of a recession, as global economic activity continues to slow down. Furthermore, central banks worldwide are nearly simultaneously raising interest rates to respond to inflation. These movements could lead to a global recession in 2023 and a series of financial crises in emerging markets and developing economies. 

“Global growth is slowing sharply, and a further slowdown is likely as more countries enter a recession. I am deeply concerned that these trends will persist, with lasting consequences that are devastating for people in emerging markets and developing economies,” said David Malpass, President, World Bank Group. 

Central banks around the world have been raising interest rates this year with a degree of synchronization not seen in the last five decades. These increases, however, are unlikely to be sufficient to reduce global inflation to pre-pandemic levels. To level the global core inflation rate, excluding energy, at around 5 percent in 2023, factors such as supply disruptions and labor market pressures will need to diminish. 

Following insights from past global recessions, the World Bank analyzed recent developments in economic activity and observed that a slowdown, such as the one underway, typically calls for counter-cyclical policies to support economic activity. However, the threat of inflation and limited fiscal space are leading policymakers in many countries to withdraw policy support even as the global economy slows markedly.

The slowdown could lead to a recession or stagflation, as previously mentioned by MBN. However, the World Bank and other players warn that a recession seems more likely. “Downside risks continue to dominate the outlook with just a tremendous amount of uncertainty that needs to be taken into account. We do expect some countries to face a recession in 2023. It’s too early to say whether that would be a widespread global recession,” Gerry Rice, spokesman, International Monetary Fund (IMF), told Reuters. 

In Latin America, the decision to raise rates early on has helped to keep exchange rates in check. Some are optimistic that the region will be able to avoid crises, despite the coming turbulence. While it is improbable that Latin America will experience a major economic contraction or a rampant rise in unemployment, it runs the risk of prolonging the economic stagnation of the last decade, according to the World Bank. 

Mexico’s direct relationship with the US represents a latent uncertainty. Despite the fact that the Latin American country may want to rely on nearshoring and foreign direct investment, these two factors may not be sufficient to rescue the country’s economy, especially taking into account recent disagreements pertaining the USMCA.