The World Bank warns that the global economy may be in a ‘lost decade’

The increasing frequency of global crises continues to weigh on output even as the economy shows signs of recovery. Efforts by central banks to tame inflation by raising interest rates have sparked turmoil in the banking sector, leading to the failures of Silicon Valley Bank and Signature Bank in the US this month and the bailout of Credit Suisse by UBS.

Chief economic officials have been watching to see if the stress on the banking system becomes a significant economic headwind that could push the United States into recession.

“It definitely brings us closer right now,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said of the recession on CBS’ “Face the Nation” Sunday. “What is not clear to us is the extent to which these banking pressures lead to a full-scale credit crunch.”

Kristalina Georgieva, managing director of the International Monetary Fund, said on Sunday that “risks to financial stability have increased” and that given the high levels of uncertainty, policymakers must remain vigilant. She indicated that the recent turmoil may have implications for the International Monetary Fund’s global economic outlook and financial stability report, which will be released in the next few weeks.

“At a time of high debt levels, a rapid transition from a prolonged period of low interest rates to much higher rates – which is necessary to combat inflation – inevitably generates pressures and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” said Ms. Georgieva at the China Development Forum.

The International Monetary Fund said in January that it believed a global recession could be avoided as growth begins to pick up later this year. At the time, it predicted output would be more resilient than previously expected, and raised growth forecasts for 2023 and 2024, but warned that “financial stability risks remain high.”

World Bank officials said that if the current banking turmoil turns into a financial crisis and recession, the global growth outlook could be weaker due to job and investment-related losses.

“However you look at it, if the current situation worsens and turns into a recession, especially a recession at the global level, this could have negative implications for long-term growth prospects,” said Ayhan Kose, Director of the World Bank’s Prospects Group. and lead author of the report.