World Economy May Witness Recession, Central Banks Unchained: Economists

World Economy May Witness Recession, Central Banks Unchained: Economists

World economy can witness a recession as economists polled by Reuters slashed growth forecasts once again for key economies, while central banks around the globe keep raising interest rates to tame persistently-high inflation.

According to Reuters, one bright spot is that most major global economies already in a recession or heading into one are starting with relatively low unemployment compared with previous downturns. The latest poll suggested this is the smallest gap between growth rates and joblessness in at least four decades. But while that might deaden the intensity of recessions, most respondents say it will be short and shallow in key economies, which may also keep inflation elevated for longer than most currently expect.

A strong 70 per cent majority of economists, 179 of 257, said chances of a sharp rise in unemployment over the coming year were low to very low, underscoring how widespread the view is among forecasters that it won’t be a devastating recession.

Global growth is forecast to slow to 2.3 per cent in 2023 from an expected 2.9 per cent this year, followed by a rebound to 3.0 per cent in 2024, according to Reuters polls of economists covering 47 key economies taken September 26-October 25.

A majority of the top global central banks are over two-thirds of the way to the expected terminal interest rate, but with inflation still much higher than their mandates, the risk is those rate expectations are too low.

According to Reuters report, after being late to call the inflation problem, global central banks have spent most of this year frontloading rate hikes to catch up. Most economists and central banks are of the view there will be little work left to do next year.

Michael Every, global strategist at Rabobank, said, “Risk of a global recession” is what everyone’s talking about and has become mainstream in forecasts. “I think that’s pretty much a no-brainer when you look at the trend in all the key economies.”

Looking at the low jobless rate is problematic, Every said, “Because it is a lagging indicator and the longer it stays stronger the more central banks will feel that they can continue to hike rates.”

Of the 22 central banks polled this time, only six were expected to hit their inflation targets by the end of next year. That was a downgrade from July surveys, where two-thirds of 18 were expected to hit their respective targets by then.

Analysts at Deutsche Bank wrote: “…history never repeats exactly, but since inflation forecasting has generally been so poor over the last 18 months, it’s worth us asking what normally happens when inflation breaches these thresholds. The answer is that it’s normally quite sticky.”

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