The world will fall into a global recession and prolonged stagnation Unless industrialized countries soon change the course of their restrictive monetary and fiscal policies, the UN Conference on Trade and Development warned on Monday (UNCTAD), adding that the situation could become worse than the one that followed the financial crisis of 2008 and the pandemic in 2020.
The 2022 edition of the Trade and Development Report foresees a global growth of 2.5% this year and 2.2% in 2023warning that the rise in interest rates and the tightening of fiscal policy applied by the industrialized economies, added to the cascade of crises derived from the pandemic and the war in Ukraine, have made the world economy go from slowdown to recoil, leaving virtually no room for a soft landing.
Higher interest rates, a “reckless” policy
UNCTAD exposes how little effect a decade of historically low interest rates had on inflation and growth targets, arguing that this time neither will they achieve the goal of controlling inflation without triggering a recession. This is an “unwise” policy, he says.
In the reality that the world is going through, with falls in real wages, fiscal adjustments, financial turmoil and insufficient multilateral support and coordination, excessive monetary tightening “could result in a period of economic stagnation and instability for many developing countries and some developed ones”, he points out.
UNCTAD projections indicate that this year’s increase in interest rates in the United States Joined will reduce the future income of developing countries by some 360 billion dollars -with the exception of China-, and perceive the measure as a sign of more problems to come.
The publication adds that all regions will be affected, with the worst effect in developing countries, many of which are near default on the debt.
It also weighs the worsening climate crisiscausing growing loss and damage in vulnerable countries that lack the fiscal space to deal with disasters, much less invest in their long-term development.
can still be corrected
Despite the gloomy outlook, there is still room to correct course, he asserts.
“We have the tools to contain inflation and support all vulnerable groups. It is a matter of political choice and political will. However, the current course of action is hurting the most vulnerable, especially in developing countries, and risks leading the world into a global recession,” said Rebeca Grynspan, secretary-general of the UN agency.
The study explains that, given the deterioration of financial conditions, net capital flows to developing countries are negative, which has created the paradox that developing countries are financing the industrialized ones.
High risk of a debt crisis
Some 90 developing economies have devalued their currencies against the dollar this year and its foreign exchange reserves are falling while spreads on bond yields are widening, resulting in more expensive debt and a worrying increase in the risk of a global debt crisis.
To counteract the serious situation that the most backward economies are going through, UNCTAD calls for increase Official Development Assistance and special drawing rightsamong other provisions to support developing countries.
“In addition, it should be a priority to advance in a multilateral legal framework to manage debt restructuringincluding all official and private creditors”, he emphasizes.
Inflation
Regarding inflation, the analysis says that in developed nations has been triggered mainly by the increase in the prices of basic productsespecially energy, and supply chain disruptions, while in developing countries inflation is due to energy prices and currency depreciation.
On the other hand, the war in Ukraine has increased the turmoil in the commodity markets, which has not ceased for more than a decade. In this field, UNCTAD highlights the role of speculatorswhich have too much influence on futures contracts, commodity swaps and funds that are traded on the stock market.
In this sense, he advocates a better regulation and for a tax on windfall profits to curb the price hikes that push millions of people into extreme poverty while companies get ridiculously rich.
Latin America
In Latin America and the Caribbean the landscape is gray: The external environment will pose an additional major obstacle to growth in the coming years, especially in the most indebted countries.
According to UNCTAD, the region will experience a sharp slowdown, going from 6.6% in 2021 to 2.6% this year and just 1.1% in 2023.
Argentina, Brazil and Mexico, the economic engines of the region will slow down after the rebound in 2021 that followed the contraction generated by the pandemic. Brazil and Mexico, the largest economies, will grow 1.8%, with Mexico unable to reach its 2019 level.
Rebeca Grynspan pointed out that for most of the Latin American economies the deterioration of world financial conditions and changes in economic policy in advanced countries will affect growth, increasing exposure to external shocks.
The report indicates that although the international prices of goods in the region’s export basket – such as energy, food, fertilizers and minerals – rose for a few months, the rises were short-lived and pressured domestic prices.
As for the rest of the world, UNCTAD considers that the tightening of monetary policy in Latin America carries the risk of a drastic depression of domestic demand, which could cause not only a recession, but also social upheaval.
More jobs, better wages and regional cooperation
“Boosting job creation and allowing delayed increases in real wages will, in the current context of global inflationary pressures and weak external demand, be the big policy challenges facing most countries as they seek to address long-standing inequalities, reactivate growth and recover economic stability”, states the text.
Faced with this scenario, the Secretary General of UNCTAD fought for a stronger regional cooperation, since this would offer “a backup against unforeseen shocks and would help take advantage of new sources of economic growth.”
