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We cannot avoid a global recession, says a World Bank economist

World Bank (SB) Chief Economist Carmen Reinhart doubts that the US and global economy will be able to avoid recession given the sharp rise in inflation and interest rates, as well as the slowdown in growth in China.

Reducing inflation while providing the economy with a so-called soft landing is historically a difficult task, and the risk of a recession is clearly a hot topic at the moment, Reinhart said in an interview with Reuters.

“The concern for everyone right now is that all the risks are stacked on the downside,” Reinhart said. She mentioned a number of adverse shocks and the actions of the US central bank (Fed), which after more than ten years of extremely low and negative rates, started raising interest rates.

A soft landing refers to a situation where economic growth slows down at an acceptable rate so that it does not do much damage, especially in terms of unemployment. The opposite is a hard landing when the economy slows down sharply, many companies find themselves in trouble and are forced to lay off workers. Sometimes a hard landing can be caused by the central bank sacrificing economic growth in an effort to stop high inflation.

The global financial crisis of 2008 and 2009 mainly affected a few developed countries, and China was a strong engine of growth at the time. However, the current crisis is much broader and the growth of the Chinese economy is no longer in double digits, Reinhartová pointed out.

Which countries have raised prime rates this year? Check out the overview

Money

In June, the Czech National Bank increased the base interest rate by 125 basis points to seven percent, which is the most since 1999. More than four dozen countries have chosen a similar method of combating rapid inflation in the world this year, the largest of which are Russia, Brazil, and the Czechia. At the end of June, experts were shocked by Hungary, which unexpectedly raised the rate to the highest level in the EU, and on the last day Sweden joined in, raising the base rate the most in twenty years.

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Unfavorable prospects

In May, the SB worsened the global economic growth forecast for this year by almost a third, or to 2.9 percent. She warned that the damage caused by the COVID-19 pandemic was compounded by the invasion of Ukraine by Russian troops and that many countries were now facing recession. She also added that if downside risks materialize, global growth could slow to 2.1 percent this year and 1.5 percent next year.

“I’m quite a skeptic. In the mid-1990s, under (Fed Alan) Greenspan, we had a soft landing, but inflation concerns were around three percent, not 8.5 percent,” Reinhart said when asked if it was possible that the U.S. or manage to avert an economic recession worldwide. She added that there are not too many cases where the economy would not be affected by a significant tightening of monetary policy in the US.

According to Reinhart, the government of US President Joe Biden was not alone in misjudging the extent of the inflation risk. The Fed, the International Monetary Fund (IMF) and other institutions shared this view, even though the World Bank had already identified inflation as a real risk from the beginning.

“The Fed should have acted — and I’ve been saying this for a long time — sooner rather than later and more aggressively,” Reinhart said. “The longer you wait, the more draconian measures you have to take,” she concluded.

Jerome Powell, head of the Fed

The Fed will unleash an interest rate battle, which will be particularly affected by Italy. And probably the Czechs too

Money

Already this Wednesday evening, Central European time, the head of the American central bank, Jerome Powell, will speak and announce what measures the Fed has prepared to combat dramatically rising inflation. The base rate is expected to rise by 0.5 percent in May and by another half percent in June. This will significantly widen the gap between American and European interest rates. And that will be a big problem for the ECB and its head Christine Lagarde.

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World Bank headquarters in Washington.

World Bank: It will get worse. And for a really long time

Money

The growth of the world economy will slow down by almost half this year – from last year’s 5.7 percent, it will decrease to 2.9 percent. The World Bank (SB) predicted it today. It thus worsened its January forecast, in which it expected growth of 4.1 percent. According to the bank, the war in Ukraine, rising inflation and rising interest rates are behind the deterioration of the outlook.

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