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Global recession could happen because of wealthy nations raising interest rates, the United Nations says

Governments around the world are determined to bring down inflation whatever the cost, but a growing chorus of voices is pointing out that aggressive monetary policies could have some serious and long-lasting consequences on the world economy.

Central banks in the US, Europeand the UK have pursued relentless monetary tightening policies this year to reduce domestic inflation, but transnational institutions including 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 persistently high prices, according to a Monday report.

“The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies,” the UN Conference on Trade and Development (Unctad) cautioned in an annual global trade forecast report released on Monday.

The report predicted that current monetary policies in wealthy nations could spark an economic downturn worldwide, with growth slipping from 2.5% in 2022 to 2.2% next year. The UN says that such a slowdown would leave global GDP well below its pre-pandemic norm, and cost the world economy around $17 trillion, or 20% of the world’s income. And developing nations will be the most negatively impacted, according to the report, and many might be facing a recession worse than any financial crisis in the past 20 years.

“The policy moves that we have seen in advanced economies are affecting economic, social, and climate goals. They are hitting the poorest the hardest,” Unctad director Rebeca Grynspan said in a statement accompanying the report’s release.

“They could inflict worse damage than the financial crisis in 2008,” 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 spectacularly, resulting in high levels of public and private debt in the developing world, the report says.

Rising interest rates and fears of a coming recession have been felt the value of the US dollar soaring against all other currencies this year. And while this has been Great news for American tourists traveling abroad, it’s a fiscal nightmare for developing countries, where import prices are rising fast and servicing dollar-denominated debt is becoming untenably expensive.

Debt levels in emerging markets have been hit record highs for monthsbut the strong dollar has exacerbated uneven balances and raised inflation in developing nations as well, according to a separate economic report from the UN published on Monday.

With debt becoming more expensive to service, emerging economies have fewer funds available to invest in health care, climate resilience, and other critical infrastructure, the Unctad report warned, which could lead to a prolonged period of economic stagnation.

“We may be on the edge 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 every country today is because of a “distribution crisis,” caused by supply-chain bottlenecks unresolved from the pandemic, and recommended wealthy nations invest more in developing nations and optimizing supply chains around the world.

Grynspan also called for more debt relief and restructuring packages for emerging economies that are struggling to service their debt.

Unctad joins a growing number of transnational institutions calling on wealthy nations to consider what their efforts to reduce inflation at home is doing to the global economy. Last week, World Bank president David Malpass urged wealthy countries to focus on the supply side of the inflation problem by investing more in production in developing nations and in optimizing supply chains.

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