Global economy could face recession with monetary tightening: World Bank report

The global economy could soon face a recession due to central banks' monetary tightening and rising interest rates, the World Bank said in a report on Thursday.

"Experience from earlier recessions suggests that at least two developments -- which either have already materialized in recent months or may be underway -- heighten the likelihood of a global recession in the near future," said the report titled 'Is a Global Recession Imminent?'

The World Bank said every global recession since 1970 was preceded by a significant weakening of global growth in the previous year, which has happened recently, while all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies.

"Despite the current slowdown in global growth, inflation has risen to multi-decade highs in many countries ... many countries are withdrawing monetary and fiscal support. As a result, the global economy is in the midst of one of the most internationally synchronous episodes of monetary and fiscal policy tightening of the past five decades," said the report authored by Justin Damien Guenette, M. Ayhan Kose and Naotaka Sugawara.

The report analyzed three scenarios for the global economy for the 2022-24 period.

The first scenario includes the current monetary policy tightening cycle may not be enough to restore low inflation, while the second scenario assumes additional monetary policy tightening by major central banks, in which the global economy would escape a recession in 2023 but would experience a sharp downturn.

And, the third scenario indicates that additional increases in interest rates would trigger higher risk in global financial markets and result in a global recession next year.

"Policymakers need to navigate a narrow path that requires a comprehensive set of demand- and supply-side measures," the report said.

"On the demand side, monetary policy must be employed consistently to restore, in a timely manner, price stability ... On the supply-side, they need to put in place measures to ease the constraints that confront labor markets, energy markets and trade networks," it added.