What does the outlook for the economy hold for 2023? Are we on the verge of a new recession? What will be the impact of the increase in interest rates on the central banks of most countries? The World Bank’s recent report makes advances in this regard. Let’s see.
The background to an announced crisis
The effects produced, first of all by the COVID-19 pandemic, and then the conflict in Ukraine, have had a significant impact on inflation, which has increased almost all over the world.
In the United States, cumulative inflation in 2022 is estimated at 6.8%. Although the annual variation of the CPI in some areas is above this; for example, transport increased by 21.2% and food by 10.3%.
On the other hand, a rate of 9.3% is estimated in the European Union and 8.5 % in the euro area. However, in September this inflation reached 10.9% and up to 11.5% in October.
Then, faced with this situation, the debate has begun on how governments should intervene to try to counter inflation. Thus, the Federal Reserve System of the United States announced in March a first increase in interest rates.
In the same way, central banks around the world have been raising rates in 2022. And this trend is expected to continue in 2023. In this regard, the increase in global monetary policy rates may reach 4%.
However, as the cost of money increases, in practice, this translates into an increase in credit. And with such high rates, it is not convenient to get into debt. Therefore, companies are affected, not being able to ask for money to make investments or having to moderate themselves in doing so.
Likewise, this affects governments in terms of financing public spending, and people in general, who request mortgage loans for the acquisition of vehicles or any other expense.
The world economy in 2023
Such measures are expected to have some effect, by cooling the economy. And although this favors savings, it is not good for consumption. Of course, the results of such decisions on inflation policy will vary according to the conditions of each country or region.
On the other hand, by decreasing the investment capacity of companies, production is also affected, which generates an effect of slowing economic growth. This is the opinion of the President of the World Bank Group, David Malpass, who believes that a further slowdown is likely to occur if other countries also enter into a recession, affecting emerging markets and developing economies much more.
Even, interest rate increases may not have the full desired effect concerning the objective, which is to reduce inflation. The report cited at the beginning indicates that these measures could leave the global core inflation rate at 5% in 2023, which is twice the average sustained during the last five-year period before the pandemic. This does not include the energy sector, which is a separate case. In addition, other factors must be added; for example, consumer confidence has fallen more sharply, compared to periods before other previous recessions. And to complete the picture, the three largest economies are slowing down, we are referring to the United States, the Eurozone and China. And although the GDP of each one has grown; it has not done so at the same pace as in other years.
According to a recent Eurostat report, the overall GDP of the Euro Area moderated its growth in the third quarter (July -September) of 2022, with 0.3%, below the 0.8% it maintained during the second quarter (April-June) of the same year.
Similar situations in the past have led to consequences such as those that are foreseen or feared. The recession of 1982 is a clear example of the risk of allowing high inflation to remain for a long time, along with weak growth.
Precisely, this global crisis of the year 82 coincided with a low growth rate in developing economies; in fact, it was the second lowest during the last fifty years, surpassed only by that of 2020, the year of full expansion of COVID-19.
Under these circumstances, and based on the knowledge of those previous situations, as well as on the analysis of recent developments, experts think that the world economy could easily enter into recession in 2023.
Measures to alleviate the crisis
To reduce inflation to more moderate levels and keep it under control, central banks will have to raise interest rates by at least 2% more, which is expected. In fact, the president of the US Federal Reserve has already announced that another round of increases will be applied during 2023, and their magnitude will depend on the economic conditions observed.
But, we have already seen that this can be a double-edged sword, having an impact on global GDP growth, exacerbating the slowdown. So, are there any other alternatives? If so, what are they?
According to the World Bank report initially cited, the focus should be shifted to increasing production instead of reducing consumption.
This would help faster and sustained growth and greater monetary stability, achieving the goal of low or controlled inflation and poverty reduction. Therefore, policies should be formulated to stimulate investment.
And although it is considered that efforts must be made to control inflation, this can be done without provoking situations that lead to a recession. Of course, the coordinated action of central banks and fiscal authorities is required.
Finally, the World Bank report points out other measures that can be taken to boost growth. Among these are mentioned: increasing the supply of basic products (energy, food), as well as labor force participation, decreasing price pressures and strengthening trade networks.
We hope that these suggestions will reach those responsible for decision-making, that action will be taken on time and that, instead of a recession, the world economy will have great growth in 2023.