Policy-Induced Global Recession Looms Large; Inadequate Financial Support Leaves Developing Countries in Lurch

A synchronised slowdown in the global economy: UNCTAD expects the world economy to grow 2.5% in 2022. Prospects are worsening, with growth in 2023 expected to decelerate further to 2.2%, leaving real GDP still below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17 trillion—close to 20% of the world’s income.

• 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 3%, a pace insufficient for sustainable development, further squeezing public and private finances and damaging employment prospects.
• Middle-income countries in Latin America, as well as low-income countries in Africa, will register some of the sharpest slowdowns this year. Countries that were showing signs of debt distress before COVID-19 are taking some of the biggest hits (Zambia, Suriname, Sri Lanka) with climate shocks further threatening economic stability (Pakistan).

Debt distress and under-investment: Net capital flows to developing countries have turned negative with the deterioration of financial conditions since the last quarter of 2021, the report says. On net, developing countries are now financing developed ones.

• Ninety developing countries have seen their currencies weaken against the dollar this year—over a third of them by more than 10%; foreign exchange reserves are falling and bond spreads are widening, with a growing number posting yields 10 percentage points higher than US treasuries.
• Currently, 46 developing countries are severely exposed to multiple economic shocks and another 48 seriously exposed, heightening the threat of a global debt crisis.
• The situation in developing countries is much more tenuous than recognised by the G20 and other international financial fora, with talk of a global financial safety net increasingly at odds with their reality.
• Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year, almost double the amount of new Special Drawing Rights (SDRs) recently allocated to them by the International Monetary Fund, and have also suffered significant impact from capital flight.
• The report recommends a programme of reforms in developing economies to boost productive investment and constrain capital moving to exploit tax loopholes, along with new arrangements to support closer regional trade, investment and financial ties.

Reclaiming the future: According to the report, the multiple crises the global economy currently faces are connected by a policy agenda that has failed on its major promises to deliver economic stability and boost productive investment, both public and private.

• With the warning signs flashing across a range of economic and environmental indicators, reclaiming the future with innovative, ambitious policies, political will and private and public support is a prerequisite for achieving ambitious development goals.
• The report lays out a strategy of increased cooperation among developing countries which, along with reforms to the multilateral architecture, could help shift the global economy in the right direction.
• There’s still time to step back from the edge of recession. We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will. But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession.