East and Southeast Asia are projected to have lower growth rates than in the five years before the pandemic.
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The United Nations has sounded a warning that the world is “on the brink of recession” and that developing nations such as those in Asia could bear the brunt.
Monetary and fiscal policies in advanced economies, including continued interest rate hikes, could push the world into global recession and stagnation, the United Nations Conference on Trade and Development (UNCTAD) said on Monday.
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A global slowdown could cause worse damage than the 2008 financial crisis and the Covid-19 shock in 2020, UNCTAD warned in its Trade and Development Report 2022.
“All regions will be affected, but the most alarming are developing countries, many of which are approaching debt default,” the report said.
We still have time to pull back from the brink of recession. Nothing is inevitable. We have to change course.
Secretary General of UNCTAD
Asian and global economies are headed for recession if central banks continue to raise interest rates without also using other tools and looking at supply-side economics, UNCTAD said, adding that a soft landing was unlikely desired.
“Today we must warn that we may be on the brink of a policy-induced global recession,” UNCTAD Secretary-General Rebeca Grynspan said in a statement.
“We still have time to pull back from the brink of recession. Nothing is inevitable. We have to change course.”
“So, we call for a more pragmatic policy mix that deploys strategic price controls, windfall taxes, antitrust measures and tighter regulations on commodity speculation. I repeat, a more pragmatic policy mix…we also need to do more efforts to end commodity price speculation.”
Impact in Asia
The prognosis is grim throughout the region, according to the UNCTAD report.
Interest rate hikes this year in the US will reduce about $360 billion of future income for developing countries, excluding China, while net capital flows to developing countries have turned negative.
“Networked, developing countries are financing the developed,” the report said.
“Interest rate hikes in advanced economies are hitting the most vulnerable hardest. Some 90 developing countries have seen their currencies weaken against the dollar this year.”
East and Southeast Asia will record lower growth rates than in the five years before the pandemic. UNCTAD expects East Asia to grow by 3.3% this year, compared to 6.5% last year.
Expensive imports and declining global demand for exports, as well as China’s slowdown will also add more pressure on this part of the region, the report said.
The debt problem is growing in South Asia and West Asia. Sri Lanka has slipped into sovereign default, Afghanistan remains in debt trouble, and Turkey and Pakistan face rising bond yields.
Pakistan is recovering from the floods and is already suffering from mounting debt and falling foreign reserves.
Focusing solely on a monetary policy approach—without addressing supply-side issues in trade, energy, and food markets—to the cost-of-living crisis may exacerbate it.
A new note from Capital Economics on Tuesday echoed the UNCTAD findings.
He said the latest global manufacturing purchasing managers’ index, which measures industrial activity, indicated that global industries “have weakened significantly and are expected to perform worse in the coming months, already that high inflation and rising interest rates are taking their toll.”
The silver lining is that this spare capacity will ease global shortages and reduce price pressures, said Simon MacAdam, senior global economist at Capital.
This situation is the result of the rush to fix interest rates after years of very low rates with global policymakers failing to raise inflation at the time or generate healthier economic growth, UNCTAD added .
“Focusing solely on a monetary policy approach, without addressing supply-side issues in trade, energy and food markets, can exacerbate the cost-of-living crisis,” UNCTAD said.
“With current supply chain challenges and growing uncertainty, where monetary policy alone cannot safely reduce inflation, pragmatism will have to replace ideological conformity to guide future policy moves.”
UNCTAD suggested that countries look at overdue wage increases and continue to create jobs.
There should also be more public investment in economic and social infrastructure to boost employment, increase productivity, improve energy efficiency and reduce greenhouse gas emissions.
Governments should consider tax reforms, including higher taxes on wealth and windfall profits, a reduction in tax cuts and regressive tax loopholes, and a crackdown on tax havens by companies and the super-wealthy , according to the report.