After emerging from the Covid pandemic, it was perhaps reasonable to assume that the global economy could relax, but the rapid, if uneven, recovery of 2021 is already a distant memory. We have seen huge fiscal packages introduced by governments in response to rising energy prices coupled with rising interest rates to tackle rapidly rising inflation.

A paper from the UN Conference on Trade and Development (UNCTAD) argues that this monetary and fiscal policy could make the global recession worse and inflict damage that exceeds that seen during both the financial crisis of 2008 and the Covid pandemic. The authors suggest that the rapid interest rate rises together with fiscal tightening threaten to turn a global slowdown into a recession.

Faltering strategy

The report highlights how during the preceding decade, when interest rates were consistently extremely low, central banks proved unable to generate healthy economic growth. The authors don’t believe that higher interest rates now will be any more successful in bringing down prices without also generating a recession. Instead, this could result in a period of both economic instability and stagnation, especially in developing countries. They highlight that the interest rates in the US alone could reduce the future income of developing countries by approximately $3.6 trillion.

“There’s still time to step back from the edge of recession,” the authors explain. “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.”

The report highlights how the Covid recovery period has been inflationary for advanced economies, and much more so than for developing countries, where inflation rates tend to be higher as a matter of course.

Inflationary forces

The inflation in most developed countries has been driven by energy and other commodities, with supply chain difficulties also adding to the situation. Indeed, when energy is stripped out of inflation measures, then the figure falls significantly below the current consumer price inflation.

While the Conservative party seems to be mirroring the policy choices of the 1970s, the report suggests this would be a serious gamble that could backfire.

“The real problem facing policymakers is not an inflation crisis caused by too much money chasing too few goods, but a distributional crisis with too many firms paying too high dividends, too many people struggling from paycheck to paycheck and too many governments surviving from bond payment to bond payment,” the authors explain.

Changing course

Indeed, with inflation already easing in many advanced economies, the authors argue for a change in approach from policymakers so that price spikes in areas like food and energy are tackled directly.

They cite the impact the Black Sea Grain Initiative, which is led by the United Nations, has had on lowering food prices, with the FAO Food Price Index down for the fifth month in a row. Cereal prices went down 1.4%, led by a 5.1% drop in international wheat prices linked to the resumption of exports from the Black Sea ports in Ukraine for the first time in over five months of interruption.

Nevertheless, the report underlines the need for increased support for vulnerable groups, including lower-wage workers and households in financial distress, warning of the damage that monetary tightening is causing to economic, social and climate goals, hitting the poorest the hardest.

UNCTAD urges a more pragmatic strategy that deploys strategic price controls, windfall taxes, anti-trust measures, and tighter regulations on commodity speculation.

Ending commodity price speculation

Commodity prices climbed for much of the last two years, with costlier food and energy posing significant challenges for households everywhere. Added upward pressure on fertilizer prices means the damage could be lasting.

The war in Ukraine has contributed to this situation but commodity markets have been in a turbulent state for a decade. Insufficient attention has, according to the report, been paid to the role of speculators and betting frenzies triggered by their oversized footprint in futures contracts, commodity swaps, and exchange-traded funds.

The report outlines better regulation (some promised after the global financial crisis) and calls for windfall taxes to be part of the policy mix governments deploy to curb price spikes that hit consumers in the developing world hard, pushing hundreds of millions of people back into extreme poverty as corporations reap record profits.

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, it says. 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.