It now appears certain that the global economy is escaping the bear, only to fall to the lion. If 2022 is all about our universal fight against the inflation wrecking ball, it’s the central banks’ crusade against price rise with aggressive rate hikes that’s likely to land us in a global recession, the World Bank confirmed as much on Friday.
In a follow-up to its previous warning issued in June, the multi-lateral agency reminded us that many countries can’t avoid a recession and how tight monetary policies could ‘cause significant financial stress’ and trigger a global recession in 2023! Global GDP growth would slow to 0.5 per cent, alongside a 0.4 per cent contraction in per capita growth, meeting the technical definition of a global recession, it added. In fact, the IMF and several private forecasts issued similar warnings.
As we speak, the world is witnessing its steepest slowdown since 1970. We are yet to absorb the economic downturn in the US and the European Union, which will have a considerable impact on emerging economies including India.
The news that China is bracing for a slowdown worse than 2020, followed by the slack in the Japanese economy only makes one thing certain: We are on the edge of the blade situation and as the World Bank noted, all it needs is a nudge to tip the global economy into a recession.
Its economists, however, assured that it’s ‘not all doom and gloom,’ and urged policymakers to shift focus from consumption to production. They want central banks to communicate policy decisions clearly to reduce the degree of tightening needed as big rate increases raise the risk of recession and slow down economies. The warning comes ahead of the US Federal Reserve and the Bank of England policy reviews, both of which are likely to raise rates next week.
Policymakers first erred in acknowledging the likelihood of persistent inflation, which touched a four-decade high in some countries. Much of this was due to the staggering $17 trillion pandemic-related fiscal stimulus, which can be best-described paraphrasing author David Pilling’s words: Only in economics is endless expansion seen as a virtue. In biology, it’s called cancer.
It was too late, but as soon as the kindness party ended, inflation reared its ugly head pressing central banks into action. Until a point, it seemed as though monetary authorities had a game in hand, but the Russian war, supply chain bottlenecks, high commodity prices and others changed course and the rate hikes originally meant to rescue economies are instead driving them towards a recession. If it happens, it’ll only prove how much policymakers have been wrong in either direction.
For now, US mortgage rates peaked at a 2008-high, making borrowing costs steeper for consumers and businesses, denting demand. Back home too, interest rates could be on the boil with the RBI likely raising rates further this fortnight and following up with more in December.
Offering a crumb of comfort is private consumption, which saw a 26 per cent jump in Q2 over last year, but is hostage to inflationary pressures and rising interest rates. Even though India is on the cusp of a recession, policymakers have the challenging task to maintain the economic momentum.