World Bank warns of global recession as growth forecasts cut for 2023

Just when the markets were beginning to feel a little more optimistic, a reminder of the predicament facing the world arrived. The World Bank cut its growth forecasts Tuesday, painting a grim picture of the year ahead for many nations.

Global recession on the cards

The World Bank expects global GDP growth of 1.7% in 2023. Outside of 2009, which was the aftermath of the Great Financial Crash, and the COVID-inspired 2020, it is the lowest rate since 1993. You don’t need me to tell you that that is…not good.

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Even more startling is the fact that the 1.7% forecast came not too long after its last report in June 2022, when the bank forecasted global growth for 2023 to land at 3%.

Given fragile economic conditions, any new adverse development — such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic or escalating geopolitical tensions — could push the global economy into recession 

World Bank

And so, the “R” word is firmly in the lexicon for nations around the globe. This is the dilemma that faces central banks across the globe, of course. Interest rate hikes are needed in order to rein in rampant inflation, but hike too far and a recession will be triggered.

This has sparked the cat-and-mouse game between the stock market and the Fed, with investors trying to second guess the Fed and predict whether it is as adamant as it claims to be about inflation, or whether to call its bluff and assume a pivot will come if things get too hairy.

Thus far, however, the Fed hasn’t played around. Interest rates have been pushed north and with inflation elevated to such high levels – and despite a softening outlook over the last month and hope that it may have peaked – it appears increasingly unlikely that a tangible slowdown won’t be required to tackle the cost of living crisis gripping countries around the world.

 Which countries are forecast to grow at what rates?

Growth in the US is forecast to come in at 0.5%, while the eurozone is predicted to be flat. “Growth in advanced economies is projected to slow down from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession”, the World Bank added.

The pain is anticipated to be worse for the emerging economies, many of which are saddled with high debt burdens and hence extra vulnerable to the rising interest rate environment. Their conditions are worsened by “compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds”

The forecasted growth of 0.5% in the US in 2023 is 1.9 percentage points below previous forecasts and would be the weakest performance outside of official recessions since 1970. This will no doubt be weighing on the minds of policymakers in the Fed.

In Europe, the eurozone got a downward adjustment of 1.9% to arrive at the 0% rate, while China has projected growth of 4.3% this year – 0.9% below previous forecasts, despite the economy opening up over the past few weeks following a long period of COVID lockdowns. China’s growth slumped to 2.7% in 2022, the slowest pace since the 1970’s, aside from 2020.

Is the worst in the past?

The trillion-dollar question is whether the worst has passed and inflation has peaked. This will be the key that decides the future path of interest rates and the fate of the global economy. The World Bank noted that inflationary pressures started to soften as the curtains closed on 2022, but warned that elevated core inflation may persist.

This core inflation is typically what policymakers focus on, as it strips out the volatile items of food and energy and is more responsive to monetary policy. With lower energy and commodity prices, the headline inflation rates have begun to fall, but core inflation has been stickier in many nations, pointing to a longer period of high rates and a more persistent problem.

The Bank outlined the bearish argument for markets:

Global inflation may be pushed higher by renewed supply disruptions, including to key commodities, and elevated core inflation may persist. To bring inflation under control, central banks may need to hike policy rates more than is currently expected

Time will tell whether inflation has peaked. For now the market will continue to predict inflation numbers and actions of the Fed. Next stop? Tomorrow’s CPI reading in the US, the all-important monthly gauge that will likely move markets significantly – the question is which way.