The rapid deterioration in growth prospects since the beginning of the year, combined with rising inflation and tighter financing conditions, has sparked a debate on the possibility of a global recession – a contraction in global GDP per capita. Drawing on insights gained from previous global recessions, this study provides a systematic analysis of the recent evolution of economic activity and policy, as well as a model-based assessment of likely near-term macroeconomic outcomes.
Evolution of activity. Since the beginning of the year, the prevailing forecasts for global growth in 2022 and 2023 have been revised down significantly. Although these forecasts do not point to a global recession in 2022-23, the experience of earlier recessions suggests that at least two developments – which have materialized or may be occurring in recent months – increase the likelihood of a near-term global recession. First, every global recession since 1970 has been preceded by a significant weakening of global growth in the previous year, as has happened recently. Second, all previous global recessions have been accompanied by a sharp slowdown or outright recession in several major economies.
Evolution of policies. Despite the current slowdown in global growth, inflation in many countries has risen to the highest levels in decades. To contain the risks posed by persistently high inflation, many countries are withdrawing monetary and fiscal support in the face of limited fiscal space. As a result, the global economy is in the midst of one of the most internationally synchronized periods of monetary and fiscal policy tightening in the past five years. These policy actions are necessary to contain inflationary pressures, but their overlapping effects are likely to have a greater impact than expected, both in terms of tightening financial conditions and in exacerbating the growth slowdown. This simultaneous tightening contrasts with policies adopted around the time of the 1975 global recession, but is similar to those implemented prior to the 1982 recession.
Recent growth results. Three scenarios for the global economy in 2022-24 are analyzed using a large-scale cross-country model. The first is a baseline scenario that fits well with recent consensus forecasts for growth and inflation and market expectations for policy rates. However, this implies that the currently expected tightening of monetary policy may not be sufficient to restore low inflation in time. The second scenario, a sharp downturn, assumes a rise in inflation expectations, which would trigger additional synchronized monetary policy tightening by major central banks. In this scenario, the global economy would still emerge from recession in 2023, but would experience a sharp downturn without a return to low inflation by the end of the forecast horizon. In the third scenario, a global recession, a further increase in policy rates would trigger a sharp repricing of risk in global financial markets and lead to a global recession in 2023. If a sustained global slowdown turns into a recession, the global economy could eventually experience a relatively large permanent loss of output to pre-pandemic trends. This would have serious consequences for the long-term growth prospects of emerging markets and developing economies already hard hit by a pandemic-induced global recession in 2020.
Policy response. Policymakers need to follow a narrow path that requires a comprehensive set of supply and demand measures. On the demand side, monetary policy must be used consistently to restore price stability in a timely manner. Fiscal policy needs to prioritize medium-term debt sustainability, while providing targeted support to vulnerable groups. Policymakers need to be prepared for potential spillover effects from the simultaneous global withdrawal of pro-growth policies. On the supply side, they need to take steps to ease constraints facing labor markets, energy markets, and trade networks.
Citation
Please use the following when citing this article: Guénette, Justin Damien, M. Ayhan Kose and Naotaka Sugawara (2022). “Is a Global Recession Imminent?” Equitable Growth, Finance and Institutions Policy Note No. 4, World Bank, Washington, DC.
