‘Real Danger’ Of Global Recession Intensifies As Rate Hikes Threaten $4 Trillion In Economic Losses, World Bank Warns

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Topline

Ahead of a meeting between global finance heads, leaders of the World Bank and International Monetary Fund warned of a growing risk of an economic slowdown next year as central banks around the world work to fight stubbornly high inflation—highlighting the uphill battle policymakers are facing to fight spiking prices without plunging the world into a recession.

David Malpass, President of the World Bank Group, speaks on stage during a summit in September.

Getty Images for Concordia Summit

Key Facts

At a joint annual meeting with the IMF on Monday, World Bank President David Malpass said the “risk and real danger” of a world recession next year is top of mind as advanced economies begin to slow down in Europe and struggling global currencies (compared to the dollar) alongside rising interest rates threaten to overburden developing markets with heavy debt loads.

As a result of the economic difficulties, the IMF calculates one third of the world economy will face at least two consecutive quarters of negative economic growth this year and next year, wiping out $4 trillion of activity—equivalent to the size of Germany’s gross domestic product and compared to $96 trillion globally last year, said IMF Director Kristalina Georgieva.

Malpass emphasized that neutralizing the world economy by hiking interest rates to more normal levels on a historical basis needs to happen “quickly” to help quell inflation, and he also criticized the increased government spending during the pandemic that helped fuel the price volatility.

“There can’t be a subsidy for everybody because then you quickly run out of money,” he said, suggesting governments should more strictly impose debt limits to help curb the risk of heightened borrowing.

He also said making a “concerted effort” to outline policies that ease supply chain constraints (which have contributed to global inflation) and help bolster production at the same time should help support recently battered markets, which are heavily influenced by inflation expectations.

Tangent

The joint summit will convene finance ministers and central bank governors from the Group of 20 (G20) economies beginning Wednesday and comes a week after the United Nations urged advanced economies to ease interest rate hikes. “The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies,” the United Nations warned in a report last week, adding that “alarm bells are ringing most for developing countries,” that are edging closer to debt default. Fed officials, however, have remained steadfast on their commitment to fight inflation by raising rates—even if it risks a recession.

Crucial Quote

“It is bad to have inflation, but we will survive as humanity,” Georgieva said Monday. “It’s very bad to have recessions—it would affect people horribly, especially poor people, but we can survive it.”

Surprising Fact

An increase in U.S. interest rates of 1 percentage point reduces real GDP by 0.5% in advanced economies and by 0.8% in emerging economies after three years, a recent study estimates. The Fed has raised rates by 3 percentage points this year.