According to a comprehensive new study conducted by the World Bank, as central banks worldwide raise interest rates simultaneously to combat inflation, there is a growing concern that the global economy may be heading towards a recession in 2023. This could lead to a series of financial crises in emerging markets and developing economies, causing long-lasting damage.

The report highlights that central banks have been increasing interest rates this year in a synchronized manner, a trend not witnessed in the past five decades. The study predicts that this trend is likely to continue into the next year. However, the anticipated path of interest rate hikes and other policy measures may not be sufficient to bring global inflation back to pre-pandemic levels.

Investors are expecting central banks to raise global monetary policy rates to almost 4 percent by 2023, which is more than a 2 percentage point increase compared to the average in 2021. Nevertheless, unless supply disruptions and labor-market pressures diminish, these interest rate hikes could result in a global core inflation rate (excluding energy) of around 5 percent in 2023. This is nearly double the five-year average before the pandemic, as revealed by the study.

To bring global inflation down to levels consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, as indicated by the report’s model. If this adjustment is accompanied by financial-market stress, global GDP growth could slow down to 0.5 percent in 2023. This would result in a per-capita contraction of 0.4 percent, meeting the technical definition of a global recession.