The United Nations Conference on Trade & Development (UNCTAD) on Thursday downgraded its global economic growth projection for 2022 due to shocks from the Ukraine war and changes in macroeconomic policies that put developing countries particularly at risk.
Significant slowdowns in growth are expected in parts of Western Europe and Central, South and Southeast Asia, the UNCTAD report said. Russia’s ongoing war against Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021.
UNCTAD is also concerned that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt burdens from the pandemic will push some developing countries into a downward spiral of insolvency, recession and arrested development.
Assuming no further shocks, UNCTAD said global growth is projected to slow to 3.6 percent in 2022 after reaching an estimated 5.3 percent expansion in 2021 resulting from demand stimulus in advanced economies and economies issuing global currencies, but still reflecting incomplete reactivation of the productive capacity idled in the recession of 2020.
Growth performance by region is very uneven. Only developed countries show the expected growth spurt, while many developing economies will remain below pre-pandemic averages. A few developing countries, including Brazil, Indonesia and Turkey, did adopt strong fiscal and monetary responses similar to those by developed countries, but recent developments suggest they are vulnerable to financial repercussions, including through currency markets, the report noted.
UNCTAD said it is still unclear whether or when the current performance of the world economy will be sufficiently strong to recover to pre-Covid trends, which in turn, were considerably lower than pre-2008 Great Recession trends. In 2020-22, the global economy faces a cumulative income loss of about $13 trillion, according to the report.
If the global economy were to grow as in the early 2000s–approximately 3.5 percent per year–it wouldn’t return to its pre-pandemic trend until 2030. Prospects for maintaining the demand stimulus and advancing transformative public investment programs over the longer term are “clouded by the returning specter of inflation,” in both developed and developing economies, the report said.
“The facts, however, do not support the fears of inflation so often mentioned in some policy circles,” UNCTAD said. “Recent inflation spikes in the Euro Area will likely remain below target. In the United States, where inflation has recently surpassed the 2 percent target, accelerating prices have been a common occurrence, especially in recovery years. Evidence points to supply shortages as the main cause of the recent inflation spikes in commodity and energy exporting countries, as well as those that provide manufacturing inputs into global supply chains.”
Where inflationary shortages affect the labor market, establishing better working conditions, including wages and social protection, can help ease the shortage by attracting more workers and contain costs by stimulating productivity growth, the report recommended. This is in contrast with the standard response that attempts to contain inflation through wage repression but effectively drives down productivity, leading to higher real unit labor costs.
“Instead, in cases where inflationary shortages affect other inputs or commodities, as is often the case in developing economies, sensible responses should focus on engineering a strong recovery of investment, incomes and of production worldwide,” UNCTAD said. “This distinction of causes and the respective responses, however, are absent from policy discussions, which have focused on demand stimulus packages. Yet in many countries, slowing demand growth by terminating the stimulus packages would not stop inflation, since its source is imported inputs, including commodities.”
UNCTAD said the success of today’s advanced economies, as well as the catch-up economies of East Asia, rests on sustained economic growth closely tied to structural transformation. This involves two sets of combined and cumulative processes–a vertical shift in the production structure from the primary sector to manufacturing and on to high-end services on the one hand, and a more horizontal shift of resources from lower to higher productivity and more capital-intensive activities within and across both sectors.
“Together, these processes have, in almost all successful development experiences, facilitated a more diversified structure of economic activity, raised productivity and led to an improvement across a broad set of social indicators, including poverty reduction,” the report said. “More diversified economies are also less vulnerable to external shocks which are likely to disrupt the growth and transformation process.”
On the connection between trade and the environment, UNCTAF said “with a debt crisis looming, the climate crisis a reality for many countries and the Agenda 2030 in trouble even before Covid-19 hit, the willingness to acknowledge the scale of the challenge facing developing countries is still missing.”
“There has been scant detail on the proposed reform agenda and even less on the resources available to lift all boats out of the immediate crisis and launch a just transition to a decarbonized world by 2050,” the report said.
One major benefit of green fiscal expansion is higher employment benefits. This is because expanding low-carbon sectors tend to be more labor intensive than shrinking high-carbon sectors. The report cited a recent study that estimated renewable energy, energy efficiency and grid enhancement will create around 19 million new jobs worldwide by 2050.As the job losses in the fossil fuel sector will be around 7.4 million, the net addition will be 11.6 million jobs.
“After decades of growing inequalities, polarizing pressures and a pandemic that has destroyed jobs on an unprecedented scale, the economic recovery provides an opportunity to rebalance the distribution of income within and between countries,” UNCTAD said. “A better world will only emerge from the pandemic if strong economic recoveries are promoted and supported in all regions of the global economy, if the economic gains from recovery are skewed towards middle and lower-income households, if health provision, including ready access to vaccines, is treated as a truly global public good and if there is a coordinated big investment push across all countries into carbon-free sources of energy.”