'We must change course': UN warns that the world is on the brink of recession

A global slowdown could potentially inflict worse damage than the financial crisis in 2008 and the Covid-19 shock in 2020, warned the UNCTAD in its Trade and Development Report 2022.

"All regions will be affected, but alarm bells are ringing most for developing countries, many of which are edging closer to debt default," the report said.

Asian and global economies are headed for a recession if central banks continue raising interest rates without also using other tools and looking at supply-side economics, the UNCTAD said adding that a desired soft landing would be unlikely.

"Today we need to warn that we may be on the edge of a policy-induced global recession," Secretary-General of UNCTAD Rebeca Grynspan said in a statement.

"We still have time to step back from the edge of recession. Nothing is inevitable. We must change course."

"We call then for a more pragmatic policy mix that deploys strategic price controls, windfall taxes, anti-trust measures and tighter regulations on commodity speculation. I repeat, a more pragmatic policy mix ... we also need to make greater efforts to end commodity price speculation."

The prognosis is grim across the region, according to the UNCTAD report.

This year's interest rate hikes in the U.S. will cut an estimated $360 billion of future income for developing nations excluding China, while net capital flows to developing countries have turned negative.

"On net, developing countries are now financing developed ones," the report said.

"Interest rate hikes by advanced economies are hitting the most vulnerable hardest. Some 90 developing countries have seen their currencies weaken against the dollar this year."

East and Southeast Asia are set to post growth rates below those in the five years prior to the pandemic. UNCTAD expects East Asia to grow at 3.3% this year, compared to 6.5% last year.

Expensive imports and a softening in global demand for exports as well as China's slowdown will also add further pressure on that part of the region, the report said.

Debt distress is growing in South Asia and western Asia. Sri Lanka has fallen into sovereign default, Afghanistan remains in debt distress, and Turkey and Pakistan face rising bond yields.

Pakistan is reeling from the floods, and is already suffering mounting debt and falling foreign reserves.

A new note by Capital Economics on Tuesday echoed the UNCTAD findings.

It said the latest global manufacturing Purchasing Managers' Index — which measures industrial activity — indicated global industries "have weakened significantly and are set to perform worse in the coming months as high inflation and rising interest rates take their toll."

The silver lining is that this spare capacity will alleviate global shortages and bear down on price pressures, Simon MacAdam, Capital's senior global economist, said.

This situation is a result of the rush to fix interest rates after years of ultra-low rates with global policy makers failing to lift inflation in that time or to generate healthier economic growth, the UNCTAD added.

"Focusing solely on a monetary policy approach — without addressing supply-side issues in trade, energy and food markets — to the cost-of-living crisis may indeed exacerbate it," the UNCTAD said.

"Under current supply-chain challenges and rising uncertainty, where monetary policy alone cannot safely lower inflation, pragmatism will need to replace ideological conformity in guiding the next policy moves."

The UNCTAD suggested that countries look at overdue wage increases and continue to create jobs.

There should also be more public investment in economic and social infrastructure to boost employment, raise productivity, improve energy efficiency and reduce greenhouse-gas emissions.

Governments should consider tax reforms, including more wealth and windfall taxes, a reduction of regressive tax cuts and loopholes and the clamping down of tax havens by firms and high-wealth individuals, the report said.