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What Happens During the 2023 Recession? Here’s the Risks and Causes

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The World Bank announced the risk of a global recession in 2023. Based on the causes and risks, what will happen in the 2023 recession?

Basically, an economic recession is a condition when a country’s economy is deteriorating. Quoted from the Financial Services Authority website, the recession can be seen from a negative Gross Domestic Product (GDP), unemployment increases, so that real economic growth is negative for two consecutive quarters.

Causes of the 2023 Recession

The World Bank noted that the 2023 recession was triggered by conditions when central banks around the world simultaneously raised interest rates in response to inflation.

Inflation is the process of increasing prices in general and continuously. There are various triggers for inflation, for example the COVID-19 pandemic and the Russia-Ukraine conflict which complicates supply chains for commodities needed by various countries.

World investors expect central banks to raise global monetary policy rates by almost 4 percent through 2023. This increase is more than 2 percentage points above the 2021 average.

A World Bank study found the rate hike could bring global core inflation, excluding energy, to around 5 percent by 2023, unless supply disruptions and labor market pressures ease. This figure is almost double the five-year average for inflation before the pandemic.

Meanwhile, to cut global inflation to levels consistent with their targets, central banks are expected to need to raise interest rates by an additional 2 percentage points.

If the increase in interest rates is accompanied by financial market pressures, global Gross Domestic Product (GDP) growth will slow to 0.5 percent in 2023. This means that there will be a contraction of 0.4 percent per capita. Well, this condition is technically what is meant by a global recession.

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In addition to rising interest rates, the financial crisis in emerging markets and emerging economies is said to trigger a long-lasting 2023 recession.

World Bank Group President David Malpass said the 2023 recession risks slowing global growth.

A number of impacts of the recession that are at risk for the community include rising prices for daily necessities including food, job cuts, rising prices for energy supplies, and rising poverty rates.

“Global growth is slowing sharply, with the possibility of a further slowdown as more countries fall into recession,” Malpass said.

He said, in the 2023 recession, there are efforts that can be made to improve economic growth.

“To achieve low inflation, currency stability and faster growth, policymakers can shift their focus from reducing consumption to increasing production,” he said.

“Policies should seek to generate additional investment and increase productivity and capital allocation, which are critical to growth and poverty reduction,” continued Malpass.

World Bank Acting Vice President for Equitable Growth, Finance, and Institutions Ayhan Kose further explained that recent tightening of monetary and fiscal policies has helped reduce inflation.

However, connected conditions across countries could exacerbate each other in tightening financial conditions and sharpening a global growth slowdown. For this reason, it is necessary to communicate between countries while maintaining the independence of each.

He explained, anticipating the 2023 recession, policy makers need to strengthen foreign exchange reserves, provide assistance to vulnerable households, and facilitate the reallocation of workers who have been laid off.

In addition, he continued, it is also necessary to accelerate the transition to low-carbon energy sources, introduce energy consumption measures, and strengthen global trade networks so that they are not hampered.

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