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UN warns of damage worse than 2008 global financial crisis

The UN agency’s warning came days ahead of the International Monetary Fund’s forthcoming October 2022 World Economic Outlook as world markets continue to flash red signs that the global economy is teetering on a cliff’s edge

Monetary policy moves in advanced economies risk pushing the world towards global recession and prolonged stagnation, inflicting worse damage than the 2008 financial crisis and the Covid-19 shock, the UN Conference on Trade and Development (Unctad) has cautioned.

The UN agency’s warning came days ahead of the International Monetary Fund’s forthcoming October 2022 World Economic Outlook as world markets continue to flash red signs that the global economy is teetering on a cliff’s edge.

The consensus among economists is that it is now no longer a question of “if, but when, and of what magnitude” the recession will be.

As markets grappled with the impending grim reality, Unctad expects the world economy to grow 2.5 per cent in 2022, while the growth in 2023 is expected to decelerate further to 2.2 per cent.

The synchronised slowdown is hitting all regions but is ringing alarm bells for developing countries, where the average growth rate is projected to drop below three per cent, further squeezing public and private finances and damaging employment prospects, said an Unctad report titled "Trade and Development Report 2022."

"There's still time to step back from the edge of recession," Unctad secretary-general Rebeca Grynspan was quoted as saying.

"We have the tools to calm inflation and support all vulnerable groups. But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession."

Rapid interest rate increases and fiscal tightening in advanced economies, combined with the crises resulting from the pandemic and the Ukraine conflict, have already turned a global slowdown into a downturn with the desired soft landing looking unlikely, said the report.

According to research firm Ned Davis, there is now a 98 per cent chance of a global recession, which brings some sobering historical credibility to the table. The firm’s recession probability reading has only been this high twice before — in 2008 and 2020.

In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth, Unctad report said, adding that any belief that central banks can bring down prices by relying on higher interest rates without generating a recession is an imprudent gamble.

“At a time of falling real wages, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability,” it said.

While the consensus is that a global recession is likely sometime in 2023, it’s impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the 2007-09 Great Recession, but every recession is, of course, painful.

"It's not a matter of if we'll have a recession, but what type of recession it will be," said Sean Sun, portfolio manager at Thornburg Investment Management. He expects markets will become "even more dysfunctional" and could "potentially break" as central banks continue to drain liquidity from the economy.

Some economies, particularly the US, with its strong labour market and resilient consumers, will be able to withstand the blow better than others.

“We are in uncharted waters in the months ahead,” wrote economists at the World Economic Forum in a report last week.

“The immediate outlook for the global economy and for much of the world’s population is dark,” they continued, adding that the challenges “will test the resilience of economies and societies and exact a punishing human toll. But there are some silver linings. Crises force transformations that can ultimately improve standards of living and make economies stronger,” they said.

— issacjohn@khaleejtimes.com