GENEVA
A UN agency on Monday warned of a policy-induced global recession that would leave developing countries heavily exposed to debt crises.
The Trade and Development Report 2022 released by the UN Conference on Trade and Development (UNCTAD) projects that global economic growth will slow to 2.5% in 2022, followed by a drop to 2.2% in 2023.
“There’s still time to step back from the edge of recession,” UNCTAD Secretary-General Rebeca Grynspan said at a news conference.
“Monetary and fiscal policy moves in advanced economies risk pushing the world towards global recession and prolonged stagnation, inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020,” she said.
Rapid interest rate increases and fiscal tightening in advanced economies, combined with the cascading crises resulting from the COVID-19 pandemic and the war in Ukraine, have already turned a global slowdown into a downturn, with the desired soft landing looking unlikely, according to the report.
Grynspan said the world has the tools to rein in inflation and support all vulnerable groups, but “it is a matter of policy choices and political will.”
“The current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession,” she said.
US interest rate hikes
This year’s interest rate hikes in the US are set to cut an estimated $360 billion of future income for developing countries and signal even more trouble ahead, the report warned.
In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth, said the UCTAD chief.
Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is an imprudent gamble, according to the report.
“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,” said Grynspan.
The current actions by developing countries leave real gross domestic product below its pre-pandemic trend, and result in a cumulative shortfall of more than $17 trillion – close to 20% of the world’s income.
Squeezing public finance
“The synchronized slowdown is hitting all regions, but is ringing alarm bells for developing countries, where the average growth rate is projected to drop below 3%,” said Grynspan.
This a pace that is insufficient for sustainable development and will further squeeze public and private finances and damage employment prospects, according to the official.
“Middle-income countries in Latin America, as well as low-income countries in Africa, will register some of the sharpest slowdowns this year,” she said.
The report notes that countries that were already showing signs of debt distress before COVID-19 are taking some of the biggest hits.
Grynspan cited countries such as Zambia, Suriname and Sri Lanka in this category.
Climate shocks are threatening economic stability in indebted developing countries like Pakistan, she added.
The report said 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 by more than 10%, it added.
