Earlier this month, the World Bank warned in a report that the global economy might be edging toward a recession next year, as central banks act aggressively to raise interest rates to bring down persistent inflation. With the world’s three largest economies — the US, China and the eurozone — already slowing sharply this year, even a “moderate hit to the global economy over the next year could tip it into recession,” the report said.
Central banks around the world have been raising rates this year with a degree of synchronicity not seen over the past five decades, a trend likely to continue well into next year. However, the World Bank said the rate hikes and other policy actions might not be sufficient to bring global inflation back to levels seen before the COVID-19 pandemic. If supply chains continue to face bottlenecks and labor markets remain tight, the central banks’ rate hikes could leave the global core inflation rate — excluding energy — at about 5 percent next year, nearly double the five-year average before the pandemic, it said.
The report estimated in the worst-case scenario global GDP growth slowing to 0.5 percent next year, or contracting by 0.4 percent in per capita terms, which would meet the definition of a global recession. The World Bank warned that this could have devastating long-term consequences for some emerging markets and developing economies if it is accompanied by a string of financial crises.
The World Bank’s warning came after the IMF in July voiced concern that some economies would fall into recession next year, and the global economy could continue to face downside risks from high inflation and Russia’s war in Ukraine. In addition to the World Bank and the IMF, Oxford Economics, Fitch Ratings and several other institutions have also revised downward their forecasts for global GDP growth next year, with Barclays PLC predicting zero growth for the world economy.
The global economy could be caught in a vicious cycle, from combating inflation to raising interest rates and stalling economic growth. The degree of slowdowns might be unbearable for some economies. Moreover, it remains a concern whether the short-term pain inflicted by rate hikes this year would lead to long-term harm, amplified by persistent geopolitical risks around the world.
As investors expect central banks to raise global monetary policy rates to almost 4 percent next year, doubling from last year’s average, the World Bank said central banks and policymakers should seek to avoid triggering a global recession while continuing efforts to control inflation. Central banks must communicate policy decisions clearly to help anchor inflation expectations and reduce the degree of tightening needed, the report said. Fiscal authorities also need to carefully calibrate the withdrawal of support measures while ensuring consistency with monetary policy objectives, it said, adding that policymakers need to join the fight against inflation by taking steps to boost global supply.
Last week, Taiwan’s central bank hiked its discount rate for the third consecutive quarter by 12.5 basis points to 1.625 percent, having increased rates by 50 basis points since March. Taiwan’s move came after a flurry of central bank meetings around tightening its monetary policies. However, Taiwan’s pace of rate increase has been more measured compared with other major central banks, as the local central bank remained unfazed by the more hawkish US Federal Reserve, which has increased rates by 300 basis points so far this year.
As the Fed’s aggressive action is likely to continue, and most other central banks might race to follow suit, economies around the world could find it difficult to avoid the dual pressures of slowing growth and imported inflation. Taiwan should pay close attention to changes in the macroeconomic environment, take precautions and make policy adjustments as soon as possible.
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