The World Bank (a major international financial institution) says the world is “perilously close” to a global recession only three years after the last one.
The World Bank says China, Europe and the U.S. are all in a period of “pronounced weakness”, which could have spillover effects to the rest of the world.
It’s calling for “urgent” action to fight inflation, support vulnerable people and invest in at-risk developing countries.
What is a recession?
A recession is when economic activity declines. The ‘technical’ definition of a global recession is when income per person falls worldwide in a year.
Recessions can generate widespread job losses and business closures. They also leave scars – countries often take a long time to recover and those who lose jobs are at risk of lasting disadvantage.
The last global recession was triggered by the pandemic in 2020. If we have another, it would be the first time there have been two in a decade since the Great Depression of the 1930s.
Why is it likely?
One reason is rising interest rates. High interest rates are a tool to fight inflation (rising prices), but they do so by discouraging spending. This can trigger a recession if it interest rates rise over a prolonged period.
The World Bank warns there are signs of this already, including “weak” investment figures and “rapid” decline in housing markets. It identifies “substantial uncertainty” on the question of how far and for how long interest rates will rise.
Growth in economic activity has also slowed “sharply” in China, which the World Bank attributes to housing market stress, droughts and ongoing COVID restrictions.
The World Bank warns that relaxed COVID restrictions in China could lead to further disruptions as the country deals with outbreaks.
What can be done?
While the World Bank says the world is close to a recession, it has not explicitly forecast one and recommends a number of steps governments can take to “mitigate the risks”.
This includes keeping inflation in check, focusing government spending on vulnerable groups, and investing in developing countries in particular to avoid “debt distress”.
The World Bank suggests this should include development assistance, trade and “supporting climate change adaptation” as well as private sector investment.