UNCTAD’s latest report warns that the policy-induced global recession could be worse than the financial crisis that haunted governments and people across the globe between 2007 and 2009.

Policy mistakes could trigger a global recession worse than the 2007 economic crisis, the UN Conference on Trade and Development (UNCTAD) has warned. The recession and a prolonged stagnation are inevitable, unless fiscal and monetary policies holding sway in some advanced economies are quickly changed, UNCTAD said in its latest ‘Trade and Development Report 2022 – Development prospects in a fractured world.’

“There is still time to step back from the edge of recession,” said UNCTAD chief Rebeca Grynspan.

“This is a matter of policy choices and political will,” she added, noting that the current course of action is hurting the most vulnerable.

UNCTAD warns that the policy-induced global recession could be worse than the financial crisis that haunted governments and people across the globe between 2007 and 2009.

Excessive monetary tightening and inadequate financial support could expose developing world economies further to cascading crises, the agency said.

The report points out that supply-side shocks, waning consumer and investor confidence, and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.

And while all regions will be affected, alarm bells are ringing most for developing countries, many of which are edging closer to debt default.

As climate stress intensifies, so do losses and damage inside vulnerable economies that lack the fiscal space to deal with disasters.

Grim outlook

UNCTAD projects that world economic growth will slow to 2.5 per cent in 2022 and drop to 2.2 per cent in 2023. The global slowdown would leave real GDP still below its pre-pandemic trend, costing the world more than $17 trillion – close to 20 per cent of the world’s income.

“Despite this, leading central banks are raising interest rates sharply, threatening to cut off growth altogether and making life much harder for heavily indebted firms, households and governments,” says UNCTAD.

“The global slowdown will affect all economies. But developing countries are exposed most to the cascade of debt, health and climate crises.”

The report projects that world economic growth will slow to 2.5 per cent in 2022 and drop to 2.2 per cent in 2023 – a global slowdown that would leave GDP below its pre-COVID-19 pandemic trend and cost the world more than $17 trillion in lost productivity.

Despite this, leading central banks are sharply raising interest rates, threatening to cut off growth and making life much harder for the heavily indebted.

The global slowdown will further expose developing countries to a cascade of debt, health, and climate crises, the report says.

On SouthAsia and India

UNCTAD expects the South Asia region to expand at a pace of 4.9 per cent in 2022, as inflation increases on the back of high energy prices, exacerbating balance of payment constraints and forcing governments in Bangladesh and Sri Lanka to restrict energy consumption. Moreover, the limited and delayed progress in relaxing vaccine-related intellectual property rights continues to leave the region vulnerable to future outbreaks. For 2023, UNCTAD expects the region’s growth rate to decelerate slightly to 4.1 per cent.

The report says that India experienced an expansion of 8.2 per cent in 2021, the strongest among G20 countries. As supply chain disruptions eased, rising domestic demand turned the current account surplus into a deficit, and growth decelerated. The production-linked incentive scheme introduced by the government is incentivizing corporate investment, but rising import bills for fossil energy are deepening the trade deficit and eroding the import coverage capacity of foreign exchange reserves.

“As economic activity is hampered by higher financing cost and weaker public expenditures, GDP growth is projected to decelerate to 5.7 per cent in 2022,” the report says.

“Going forward, the government has announced plans to increase capital expenditure, especially in the rail and road sector, but in a weakening global economy, policymakers will be under pressure to reduce fiscal imbalances, and this may lead to falling expenditures elsewhere. Under these conditions, the economy is expected to decelerate to 4.7 per cent growth in 2023.”

Debt crisis

With 60 per cent of low-income countries and 30 per cent of emerging market economies in or near debt distress, UNCTAD warns of a possible global debt crisis.

Countries that were showing signs of debt distress before the pandemic are being hit especially hard by the global slowdown.

And climate shocks are heightening the risk of economic instability in indebted developing countries, seemingly under-appreciated by the G20 major economies and other international financial bodies.

“Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year,” almost double the amount of the International Monetary Fund’s recently allocated Special Drawing Rights to supplement their official reserves.

The UN body is requesting that international financial institutions urgently provide increased liquidity and extend debt relief for developing countries. It’s calling on the IMF to allow fairer use of Special Drawing Rights; and for countries to prioritize a multilateral legal framework on debt restructuring.

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