Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes
Study Highlights Need for Policies to Curb Inflation Without Exacerbating Recession Risk
WASHINGTON, September 15, 2022—As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and 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.
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, according to the report. 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 4 percent through 2023—an increase of more than 2 percentage points over their 2021 average.
Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic, the study finds. To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, according to the report’s model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 percent in 2023—a 0.4 percent contraction in per–capita terms that would meet the technical definition of a global recession.
World Economic Outlook, October 2022
The global cost of living has surged, with inflation rising to 40-year highs in some economies. As countries recover from the COVID-19 pandemic, supply-demand imbalances linger, dragging on economic activity and pushing prices up. At the same time, energy and food prices have spiked amid worsening geopolitical tensions.
What do these conditions mean for global inflation prospects? The forthcoming October 2022 IMF World Economic Outlook examines two economic forces that could impact inflation going forward. One chapter looks at wage dynamics post-COVID-19, wage-price spiral risks, and how policymakers can respond. Another chapter investigates the potential near-term effects of critical climate policies on inflation and economic activity and how they can be best designed.
After briefly summarizing the chapters, the presenters discussed their findings with Peterson Institute for International Economics senior fellows Olivier Blanchard and Pinelopi Koujianou Goldberg. A Q&A with the audience followed.
Is global recession imminent?
Context. Since the beginning of the year, a rapid deterioration of growth prospects, coupled with rising inflation and tightening financing conditions, has ignited a debate about the possibility of a global recession—a contraction in global per capita GDP (Figure 0.A). Drawing on insights gained from previous global recessions, this study presents a systematic analysis of the recent evolution of economic activity and policies, and a model-based assessment of possible near-term macroeconomic outcomes.
Evolution of activity. Consensus forecasts for global growth in 2022 and 2023 have been downgraded significantly since the beginning of the year. Although these forecasts do not point to a global recession in 2022–23, experience from earlier recessions suggests that at least two developments—which either have already materialized in recent months or may be underway—heighten the likelihood of a global recession in the near future. First, every global recession since 1970 was preceded by a significant weakening of global growth in the previous year, as has happened recently (Figure 0.B). Second, all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies.
Evolution of policies. Despite the current slowdown in global growth, inflation has risen to multi-decade highs in many countries. To stem risks from persistently high inflation, and in a context of limited fiscal space, many countries are withdrawing monetary and fiscal support. As a result, the global economy is in the midst of one of the most internationally synchronous episodes of monetary and fiscal policy tightening of the past five decades (Figure 0.C). These policy actions are necessary to contain inflationary pressures, but their mutually compounding effects could produce larger impacts than intended, both in tightening financial conditions and in steepening the growth slowdown. This synchronous policy tightening contrasts with the policies adopted around the 1975 global recession but is similar to those implemented ahead of the 1982 recession. A major lesson from these two episodes is that making necessary policy adjustments in a timely fashion is essential to containing inflationary pressures and reducing the output costs of policy interventions.
Near-term growth outcomes. Three scenarios for the global economy over 2022-24 are analyzed using a large-scale, cross-country model (Figure 0.D). The first, baseline scenario, aligns closely with recent consensus forecasts of growth and inflation, as well as market expectations for policy interest rates. However, it implies that the degree of monetary policy tightening currently expected may not be enough to restore low inflation in a timely fashion. The second scenario, sharp downturn, assumes an upward drift in inflation expectations, which triggers additional synchronous monetary policy tightening by major central banks. In this scenario, the global economy would still escape a recession in 2023 but would experience a sharp downturn without restoring low inflation by the end of the forecast horizon. In the third scenario, global recession, additional increases in policy rates would trigger a sharp re-pricing of risk in global financial markets and result in a global recession in 2023 (Figure 0.E). If the ongoing global slowdown turns into a recession, the global economy could end up experiencing large permanent output losses relative to its pre-pandemic trend (Figure 0.F). This would have severe consequences for the longterm growth prospects of emerging market and developing economies that were already hit hard by the pandemic-induced global recession of 2020.
Policy responses. Policymakers need to navigate a narrow path that requires a comprehensive set of demand- and supply-side measures. On the demand side, monetary policy must be employed consistently to restore, in a timely manner, price stability. Fiscal policy needs to prioritize medium-term debt sustainability while providing targeted support to vulnerable groups. Policymakers need to stand ready to manage the potential spillovers from globally synchronous withdrawal of policies supporting growth. On the supply-side, they need to put in place measures to ease the constraints that confront labor markets, energy markets, and trade networks.
Composite Leading Indicators (CLI), OECD, September 2022
Leading indicators continue to point to weakening growth in most major economies
Download the entire news release (graphs and tables included – PDF)
12 Sept 2022 – The OECD Composite Leading Indicators (CLIs), designed to anticipate turning points in economic activity over the next six to nine months, continue to signal a slowdown in most major economies and in the OECD area as a whole.
Among large OECD economies, the CLIs continue to anticipate a loss of growth momentum in Canada, the United Kingdom and the United States, as well as in the euro area as a whole including France, Germany and Italy. Stable growth continues to be expected in Japan.
Among major emerging-market economies, the CLI for China (industrial sector) now points to a loss in growth momentum. In India, the CLI continues to indicate stable growth whereas in Brazil it signals growth losing momentum.
The OECD CLIs are cyclical indicators based on a range of forward-looking indicators such as order books, building permits, confidence indicators, long-term interest rates, new car registrations and many more. Most of these monthly indicators are available up to August 2022.
In the face of persisting uncertainties related to the war in Ukraine, renewed COVID-19 threats, and the impact of high inflation on real household income, the CLI components might be subject to larger-than-usual fluctuations. As a result, the indicators should be interpreted with care and their magnitude be regarded as an indication of the strength of the signal rather than as a measure of growth in economic activity.
World Bank says interest rate hikes are leading to global recession
The World Bank has warned that synchronised interest rate hikes by central banks, led by the US Federal Reserve, are pushing the global economy into a recession and the rate increases will not bring down inflation.
A person wearing a protective face mask as a precaution against the coronavirus walks past stuttered businesses in Philadelphia, Thursday, May 7, 2020 (AP Photo/Matt Rourke) [AP Photo]
The gloomy outlook was issued in an economic update on the state of the world economy released on Thursday. While adhering to the mantra that interest rate hikes are needed to “stem risks from persistently high inflation,” the bank said its “baseline scenario” was that the “degree of monetary policy expected by market participants will not be enough to restore low inflation in a timely fashion.”
Consequently a “second scenario” of a sharp downturn, with further monetary policy tightening, would eventuate but still “without restoring inflation by the end of the forecast period.”
Under a third scenario, which appears highly likely given that inflation is not expected to come down, “additional increases in policy rates would trigger a sharp re-pricing of risks in global financial markets and result in a global recession in 2023.”
Commenting on the report, World Bank president David Malpass said; “Global growth is slowing sharply, with further slowing likely to occur 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.”
Fears of ‘Devastating’ Global Recession Grow as Central Banks Continue Rate-Hiking Frenzy
“Central bankers are supposed to be looking out for the economy as a whole,” wrote one observer. “But at the end of the day, they have the mentality of bankers, protecting creditors.”
Synchronous interest rate hikes imposed by the world’s most powerful central banks in recent months have triggered mounting concerns of a global recession that could plunge millions more into poverty, spark a surge in joblessness, and heighten economic pain for poor nations in particular.
The latest warning comes from the World Bank, which published a study late last week warning that central banks’ efforts to tame inflation by aggressively hiking interest rates—thereby increasing borrowing costs and tamping down demand—could cause a significant global economic contraction without bringing inflation back down to the pre-pandemic average.
“A dangerous contagion is spreading from the U.S. Federal Reserve to the European Central Bank and the rest of the world.”
Under a scenario of persistently high inflation, the World Bank notes, the U.S. Federal Reserve, the European Central Bank, the Bank of England, and other central banks would likely continue raising interest rates, further slowing a global economy that is already “in its steepest slowdown following a post-recession recovery since 1970.”
“If the degree of global monetary policy tightening currently anticipated by markets is not enough to lower inflation to targets, experience from past global recessions suggests that the requisite additional tightening could give rise to significant financial stress and trigger a global recession in 2023,” the study cautions. “This would entail a recession in advanced economies within the range of the contractions that occurred in the past five global recessions.
Global CEOs see a ‘mild and short’ recession, yet optimistic about global economy over 3-year horizon
More than 8 out of 10 anticipate a recession over the next 12 months, with more than half expecting it to be mild and short
Seven out of 10 believe a recession will disrupt anticipated growth
However, rising confidence in longer-term growth of the global economy and their own companies’ prospects
The KPMG 2022 CEO Outlook, which asked more than 1,300 CEOs at the world’s largest businesses about their strategies and outlook, reveals that 58 percent of leaders expect a recession to be mild and short. Fourteen percent of senior executives identify a recession among the most pressing concerns today — up slightly from early 2022 (9 percent), while pandemic fatigue tops the list (15 percent).
Over the next year, more than 8 out of 10 (86 percent) global CEOs anticipate a recession to hit, with 71 percent predicting it will impact company earnings by up to 10 percent. A strong majority of senior executives believe that a recession will disrupt anticipated growth (73 percent). However, three-quarters (76 percent) have already taken precautionary steps ahead of a looming recession.
Despite those concerns, senior executives also feel markedly more confident about the resilience of the economy over the next 6 months (73 percent) than they did in February (60 percent), when KPMG surveyed 500 CEOs for its CEO Outlook Pulse survey. Further, 71 percent of leaders are confident about the global economy’s growth prospects over the next 3 years (up from 60 percent in early 2022) and nearly 9 in 10 (85 percent) are confident about their organization’s growth over the next 3 years.
Investors predict US recession in 2023 – here are the facts
Around half of investors expect the US to enter recession in 2023, a Bloomberg Markets Live survey shows.
Deutsche Bank is the first major bank to forecast a US recession next year.
The global economic outlook is uncertain because of Russia’s invasion of Ukraine and Chinese lockdowns potentially impacting supply chains.
In the wake of the first interest rate hike since 2018, Deutsche Bank became the first major bank to forecast a US recession for next year. The report co-authored by the bank’s chief economist David Folkerts-Landau and former Fed official Peter Hooper finds that “the US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024.” The economists expect the federal funds rate to be gradually raised beyond 3.5 percent by the middle of next year, which would be at the upper limit of projections given by the Federal Open Market Committee last month. The median projection given by FOMC members for 2023 was 2.8 percent, up from the current target range of 0.25 to 0.5 percent.
The next US recession
While Deutsche Bank is the first major bank to forecast an imminent economic downturn, investors, both retail and professional, share the group’s gloomy outlook. According to a Bloomberg Markets Live survey conducted between March 29 and April 1, 48 percent of investors expect the US to fall into recession next year. Another 21 percent expect the downturn to happen in 2024, while 15 percent of the 525 respondents expect the recession to come as early as this year.
With the pandemic still lingering, the Russian invasion of Ukraine putting additional pressure on already surging consumer prices and Chinese lockdowns potentially disrupting supply chains, the economic outlook is currently clouded by uncertainties. And where there is clouds, there’s often a chance of rain, or, in this case, a recession.
Rate hikes to trigger global recession in 2023?
Global economy is severely dropping, and it will likely continue to slow as more nations experience recessions
The World Bank stated that policymakers in emerging markets and developing economies must be prepared to handle any potential spillovers from a worldwide synchronized tightening of policies.
According to a new World Bank analysis, the world may be heading into a worldwide recession in 2023 as central banks around the globe concurrently raise interest rates to control inflation. It also foresaw a series of financial crises that would permanently negatively impact emerging markets and developing economies.
A Reuters survey of economists indicated that the Federal Reserve would likely raise interest rates by another 75 basis points the following week. Nomura’s economists predict that the FOMC meeting on September 20–21 will likely result in a rate increase of 100 basis points.
The European Central Bank raised interest rates this week by 75 basis points and said it “expects to raise interest rates further because inflation remains much too high and is likely to stay above goal for an extended term.”
How Does a Recession Affect You as a Consumer?
With a Bloomberg survey reporting around a 50 percent recession chance within a year, many Americans are wondering, “How would a recession affect me?” Since a recession usually involves unemployment issues, business slowdowns and less spending, you could face being laid off, your retirement savings falling or a struggle to cover expenses. In addition, you can experience different effects related to the housing market and interest rates. Understanding these effects will help you prepare for the next recession.
Recession 2023: Is a Soft Landing Possible?
The role of the Fed is undeniably complex and the concept of a soft landing is almost mythologically simple and highly unlikely…
Are we heading towards a recession, or maybe already in one? Will the US Central Banking System, AKA “The Federal Reserve” AKA “The Fed,” cause us to go into one? Why would they do that? How would they do that? Maybe you understand Macroeconomics well, but don’t agree with some of what you’ve been hearing. Perhaps, you don’t know the first thing about the way markets work, or you need a refresher since last taking Econ 101 a decade or two ago.
Hopefully, I can help with that. Over the next several weeks, I’ll be breaking down economic concepts and current realities and providing a plethora of resources for further learning.
With any luck, that at least helps to consolidate some of the information out there in one easy to digest and structured format. Preferably, I do more than that, and help you understand what it means to you as an individual, professional, and maybe even as a business owner.
I’m not an investment advisor, so I can’t and won’t tell you what to do; but I will try to lay out some truths that, hopefully, you can use to make well-informed decisions in the months to come. But first…