EDITORIAL: Caution needed as recession looms

Earlier this month, the World Bank warned in a report that the global economy could be headed for a recession next year as central banks act aggressively to raise interest rates to bring down persistent inflation. With the world’s three largest economies — the US, China and the eurozone — already slowing sharply this year, even a “moderate hit to the global economy next year could plunge them into recession,” the report said.

Central banks around the world have hiked rates this year with a degree of synchronicity not seen in the past five decades, a trend likely to continue well into next year. However, the World Bank said the rate hikes and other policy measures may not be enough to bring global inflation back to pre-COVID-19 levels. If supply chains continue to struggle and labor markets remain tight, central bank rate hikes could keep global core inflation — excluding energy — at about 5 percent next year, nearly double the five-year pre-pandemic average, it said.

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The report estimates that worst-case global GDP growth would slow to 0.5 percent next year, or contract by 0.4 percent per capita, which would fit the definition of a global recession. The World Bank warned that if accompanied by a series of financial crises, this could have devastating long-term consequences for some emerging and developing economies.

The World Bank’s warning came after the IMF expressed concern in July that some economies would fall into recession next year and that the global economy could continue to face downside risks from high inflation and Russia’s war in Ukraine. In addition to the World Bank and IMF, Oxford Economics, Fitch Ratings and several other institutions have also revised down their forecasts for next year’s global GDP growth, with Barclays PLC forecasting zero growth for the global economy.

The global economy could be caught in a vicious circle ranging from fighting inflation to raising interest rates to stalling economic growth. The magnitude of the slowdown could be unbearable for some economies. In addition, concerns remain as to whether the near-term pain caused by this year’s rate hikes will translate into long-term damage, compounded by ongoing geopolitical risks around the world.

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As investors expect central banks to hike global interest rates to nearly 4 percent next year, doubling from last year’s average, the World Bank said central banks and policymakers should try to avoid triggering a global recession while continuing their efforts to control inflation. Central banks need to clearly communicate policy decisions to anchor inflation expectations and reduce the degree of tightening needed, the report says. Tax authorities also need to carefully calibrate withdrawals of support measures while ensuring consistency with monetary policy targets, she said, adding that policymakers must join the fight against inflation by taking steps to boost global supply.

Last week, Taiwan’s central bank raised its discount rate by 12.5 basis points to 1.625 percent for the third straight quarter after raising interest rates by 50 basis points since March. Taiwan’s move comes after a series of central bank meetings centered around tightening its monetary policy. However, Taiwan’s pace of rate hikes has been more measured compared to other major central banks as the local central bank has been unfazed by the more hawkish US Federal Reserve, which has hiked rates by 300 basis points so far this year.

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With the Fed’s aggressive actions likely to continue and most other central banks trying to follow suit, economies around the world could struggle to escape the twin pressures of slowing growth and imported inflation. Taiwan should closely monitor changes in the macroeconomic environment, take precautions and make policy adjustments as soon as possible.

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