World Bank: Here's what it will take to spark a global recession

Wednesday, 11 January 2023

China’s growth this year is expected to be lower than previously forecast.

Any adverse development hitting the world economy – such as higher than expected inflation, abrupt rises in interest rates to battle it, a resurgence of Covid-19 or rising geopolitical tensions – could put the global economy into recession this year, the World Bank has warned.

It said it would be the first time in more than 80 years that there had been two global recessions within a decade.

It has released its latest Global Economic Prospects report, which says the global economy will grow by 1.7% this year and 2.7% next.

The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.

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New Zealand has already had a warning of a local recession. The Reserve Bank said it expected its interest rate rises to lead to a long but shallow recession from April this year.

In its half-year update in December, the Treasury said global growth this year was likely to be the lowest since the early 1990s, with the exception of the pandemic and global financial crisis.

It said gross domestic product was likely to fall 0.3% in the year to June 2024.

“The crisis facing development is intensifying as the global growth outlook deteriorates,” said World Bank Group president David Malpass.

“Emerging and developing countries are facing a multi-year period of slow growth driven by heavy debt burdens and weak investment as global capital is absorbed by advanced economies faced with extremely high government debt levels and rising interest rates.

Reserve Bank governor Adrian Orr discusses the risk of a recession in May.

“Weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change.”

Growth in advanced economies, including New Zealand, is projected to slow 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 said.

In the United States, growth is forecast to fall to 0.5% in 2023–1.9 percentage points below previous forecasts and the weakest performance outside official recessions since 1970. In 2023, euro-area growth is expected at 0%–a downward revision of 1.9 percentage points.

In China, growth is projected at 4.3% in 2023 – 0.9 percentage point below previous forecasts.

Growth in other emerging market and developing economies was tipped to slow from 3.8% in 2022 to 2.7% in 2023, reflecting weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.

The World Bank said by the end of 2024 GDP in emerging and developing economies would be about 6% below the level expected before the pandemic.

Although global inflation was expected to moderate, it would remain above pre-pandemic levels, the report said.