The risk of a global recession is growing as inflation continues to rise. Central banks may have to raise interest rates further due to the ongoing strong rate increases. But the World Bank warns in a new report that this slows economic growth.
The European Central Bank (ECB), among others, is raising interest rates in big strides, just like the Federal Reserve in the United States and central banks in many other countries. Because this makes borrowing more expensive in many countries at the same time, higher interest rates can quickly slow economic growth.
In 2023, global economic growth may fall to 0.5%, according to the World Bank. This means a contraction of 0.4% per capita of the world’s population. This matches the technical definition of stagnation.
The World Bank fears that this will be accompanied by financial crises, especially in poor countries or emerging economies. They can suffer from this for a long time.
Central banks must work hard to convince the public that they will have inflation again soon, according to the World Bank. If consumers continue to rely on large price increases, this will lead to increased inflation because they will demand higher wages themselves. In this case, it will eventually be necessary to increase interest rates.
At the same time, governments should act with caution when phasing out coronavirus subsidies, because too rapid a decline could further slow economic growth. According to World Bank economists, other policy makers mainly have to combat shortages of goods and staff, which are the main cause of high inflation.
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