The US Federal Reserve (Fed) has raised interest rates by 300 basis points to date in 2022. And, further rate hikes are expected as the Fed battles to bring down inflation to under 2% from the current levels of over 8%. The tightening measures will bring pain to the economy which has already been acknowledged by Fed Chair Powell in his Jackson Hole Symposium meeting in August.
Several central banks across the world have raised rates in 2022 and such an unprecedented synchronized liquidity tightening steps risks economies going into recession. United Nations Conference on Trade and Development (UNCTAD) in its Trade and Development Report 2022 warns exactly that – “Monetary and fiscal policy moves in advanced economies risk pushing the world towards global recession and prolonged stagnation, inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020,” says the report.
According to the paper, a global slowdown has already transformed into a downturn with the planned gentle landing seeming doubtful due to quick interest rate increases, fiscal tightening in major economies, cascading problems brought on by the COVID pandemic, and the war in Ukraine.
An imprudent gamble
During a decade of historically low-interest rates, central banks repeatedly failed to achieve their inflation goals and failed to foster stronger economic growth. Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.
“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,” said Richard Kozul-Wright, head of the team in charge of the report.
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At a time of falling real wages, fiscal tightening, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones.
This year’s interest rate hikes in the United States are set to cut an estimated $360 billion of future income for developing countries (excluding China) and signal even more trouble ahead, the report warns. Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10%.
“There’s still time to step back from the edge of recession,” UNCTAD Secretary-General Rebeca Grynspan said. “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.”