Policy-induced recession to hurt developing countries – UNCTAD

MANILA, Philippines — The United Nations Conference on Trade and Development (UNCTAD) has warned that monetary and fiscal policy moves in advanced economies risk pushing the world toward global recession and prolonged stagnation, which will especially hurt developing countries.

In its Trade and Development Report 2022, UNCTAD said the rapid interest rate increases and fiscal tightening in advanced economies, combined with the cascading crises resulting from the COVID pandemic and the war in Ukraine, have already turned a global slowdown into a downturn, adding that a desired soft landing is looking unlikely.

“In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth. Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble,” UNCTAD said.

It emphasized that at a time of falling real wages, fiscal tightening, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones.

The report warned that this year’s interest rate hikes in the US could cut an estimated $3.6 trillion of future income for developing countries and signal even more trouble ahead.

“There’s still time to step back from the edge of recession,” said UNCTAD secretary general Rebeca Grynspan.

“We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will. But the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession,” Grynspan said.

The UNCTAD expects the global economy to grow by 2.5 percent this year.

“Prospects are worsening, with growth in 2023 expected to decelerate further to 2.2 percent, leaving real GDP (gross domestic product) still below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17 trillion – close to 20 percent of the world’s income,” UNCTAD noted.

It said that while the synchronized slowdown is hitting all regions, it is ringing alarm bells for developing countries, where the average growth rate is projected to drop below three percent, a pace insufficient for sustainable development, further squeezing public and private finances and damaging employment prospects.

Meanwhile, the report noted that net capital flows to developing countries have turned negative with the deterioration of financial conditions since the last quarter of 2021.

“Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10 percent; foreign exchange reserves are falling and bond spreads are widening, with a growing number posting yields 10 percentage points higher than US treasuries,” the UNCTAD said.

“Currently, 46 developing countries are severely exposed to multiple economic shocks and another 48 seriously exposed, heightening the threat of a global debt crisis,” it said.