Governments around the world are determined to reduce inflation at all costs, but a growing chorus of voices is pointing out that aggressive monetary policies can have serious and lasting consequences for the global economy.
Central banks in the US, Europe and the UK have pursued relentless monetary tightening policies this year to reduce domestic inflation, but transnational institutions such as the World Trade Organization and the International Monetary Fund have warned that this approach could push the world into a long period. of low economic growth and consistently high prices, according to a report on Monday.
“The world is headed for a global recession and prolonged stagnation unless we quickly reverse the current course of tightening monetary and fiscal policy in advanced economies,” warned the United Nations Conference on Trade and Development (UNCTAD) in an annual world trade forecast report released on Monday.
The report predicted that the current monetary policies of rich countries could lead to a worldwide economic recession, with growth falling from 2.5% in 2022 to 2.2% next year. The UN says such a slowdown would leave global GDP well below its pre-pandemic norm and cost the global economy about $17 trillion, or 20% of global income. And developing nations will be hardest hit, the report said, and many could be facing a recession worse than any financial crisis in the past 20 years.
“The policy moves we have seen in advanced economies are affecting economic, social and climate goals. They are hitting the poorest hardest,” said UNCTAD Director Rebeca Grynspan in a statement accompanying the publication. of the report.
“They could cause worse damage than the 2008 financial crisis,” Grynspan said.
A “policy-induced” recession.
The UN agency made it clear that it will hold central banks around the world responsible for causing the next global recession.
“Excessive monetary tightening and inadequate financial support” in advanced economies could backfire dramatically, leading to high levels of public and private debt in the developing world, the report said.
Rising interest rates and fears of an impending recession have pushed the US dollar higher against other currencies this year. And while that’s been great news for American tourists traveling abroad, it’s a fiscal nightmare for developing countries, where import prices are rising rapidly and dollar-denominated debt service s ‘is becoming unsustainably expensive.
Debt levels in emerging markets have been at record highs for months, but the strength of the dollar has exacerbated uneven balances and also pushed up inflation in developing countries, according to a separate UN economic report released on Monday.
With debt servicing increasingly expensive, emerging economies have fewer funds available to invest in health care, climate resilience and other critical infrastructure, the UNCTAD report warned, potentially leading to a prolonged period of economic stagnation .
“We may be on the brink of a policy-induced global recession,” Grynspan said.
The report urged advanced economies to consider ways to reduce inflation other than raising interest rates. Grynspan insisted that inflation in all countries today is due to a “distributive crisis”, caused by unresolved supply chain bottlenecks since the pandemic era, and recommended that rich nations invest more in developing countries and optimize supply chains worldwide.
Grynspan also called for more debt relief and restructuring packages for emerging economies struggling to service their debt.
Unctad joins a growing number of transnational institutions calling on rich nations to consider how their efforts to reduce inflation at home are doing in the global economy. Last week, World Bank President David Malpass urged rich countries to focus on the supply side of the inflation problem by investing more in production in developing countries and optimizing supply chains.
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