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World Bank warns higher interest rates could trigger global recession

·Business Reporter, Yahoo Finance UK
·3-min read
World Bank President David Malpass
David Malpass, World Bank president, said: “Global growth is slowing sharply, with further slowing likely as more countries fall into recession.” Photo: Mike Theiler/Reuters

The World Bank has warned that the global economy could tip into recession over the next year, with the US, China and the euro area all slowing.

It said on Friday that further interest rate hikes required to control inflation may in fact trigger a global recession.

The Bank added that the world economy was now in its steepest slowdown following a post-recession recovery since 1970, and that consumer confidence had already fallen more sharply than in the run-up to previous global recessions.

David Malpass, World Bank president, said: “Global growth is slowing sharply, with further slowing likely as more countries fall into recession.”

Read more: Pound falls to 37-year low against dollar as recession looms

In addition to this, it also warned that synchronised rate hikes around the world may not be sufficient to bring inflation back to pre-pandemic levels unless pressures from the labour market and global supply chain ease off.

It said that the global core inflation rate, excluding energy, could remain at about 5% next year. This is nearly double the five-year average before the COVID pandemic.

To bring runaway inflation down, central banks across the globe may need to raise interest rates by a further two percentage points, on top of the two-point increase already seen, the financial institution said.

However, an increase of that size, coupled with financial market stress, would slow global GDP growth to 0.5% in 2023, or a 0.4% contraction in per capita terms. This would meet the technical definition of a global recession.

It comes ahead of monetary policy meetings from the Bank of England and the US Federal Reserve next week. They are both expected to increase key interest rates.

Watch: What is a recession and how do we spot one?

Malpass urged policymakers to shift their focus from reducing consumption to boosting production, including efforts to generate additional investment and productivity gains.

It also came as the International Monetary Fund (IMF) issued a separate warning.

Russ Mould, investment director at AJ Bell, said: “To make matters worse, Alfred Kammer from the International Monetary Fund yesterday gave some stark reminders of what could happen next.

“He said: ‘There are risks that inflation could well stay uncomfortably high for longer than expected and become entrenched. Therefore, central banks should keep raising policy rates under most scenarios.

Read more: Interest rates: Inflation data makes another steep rise by Bank of England more likely

“Higher rates push up the cost of borrowing for consumers and businesses, thereby potentially leading to a drop in spending. That in turn results in lower economic activity, creating an even gloomier environment for stocks and shares. If you thought the worst was over, strap yourself in as it could be a bumpy ride as we move into autumn.

Meanwhile, Richard Hunter, head of markets at Interactive Investor, said: “With inflation remaining the major thorn in the side for central banks globally, the inevitable rate rises to lower the current levels are leading investors to question how high the possibility of recession is now becoming, with any policy errors due to over-tightening likely to be the root cause.

“Downbeat outlooks from the International Monetary Fund and the World Bank echoed such a possibility.”

Watch: How does inflation affect interest rates?