Central banks risk tipping a stalling global economy into a full-blown recession unless they relax their 2% inflation targets and adopt a more pro-growth stance, the economic arm of the UN has warned.
Pointing to evidence of a looming debt crisis in poor countries, the UN said the sharp rises in interest rates from the major central banks since 2021 had increased inequality and reduced investment but proved a blunt anti-inflation weapon.
The annual report from the Geneva-based UN Conference on Trade and Development (Unctad) said global growth was set to slow from 3% in 2022 to 2.4% in 2023, with little sign of a rebound next year.
Richard Kozul-Wright, the director of Unctad’s globalisation and development strategies division, said: “The global economy is stalling, with Europe teetering on the edge of recession, China facing strong headwinds and financial stresses are reappearing in the United States.
“At this moment, pushing down on the fiscal brakes and keeping interest rates high is the wrong policy combination for steadying the global economy.”
Unctad said the global economy was “at a crossroads” and poorer countries were being disproportionately hurt by the higher interest rates in advanced countries such as the US. A widening wealth gap threatened to undermine the fragile economic recovery and the aspirations of developing nations to meet the UN’s sustainable development goals.
“Debt burdens, the silent weight on many developing countries, remain a major concern,” the 2023 trade and development report said. “Rising interest rates, weakening currencies and sluggish export growth have combined to squeeze the fiscal space for essential needs, transforming the growing debt service burden into an unfolding development crisis.”
Warning that almost a third of low- or lower-middle income “frontier economies” were on the precipice of debt distress, the UN body said addressing the issue was paramount since meeting the demands of their creditors was “crushing too many developing countries”.
Inflation had come down from its highs in late 2022 but its descent had been uneven and was caused largely by the easing of supply-side pressures, Unctad said, adding that the recent rise in oil prices would add to cost of living concerns at a time when insufficient wage growth was squeezing household budgets.
“Tighter monetary policy has so far contributed little to price easing and at a steep cost in terms of inequality and damaged investment prospects,” Unctad said. “Central bankers should relax their 2% inflation target and assume a wider stabilising role.”
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The report said reducing inequality should be a policy priority in developed and developing countries, with a close watch kept on the share of national income going to workers. It said real – inflation-adjusted – wages should increase in line with productivity growth, with concrete commitments toward comprehensive social protection.
Unctad’s secretary general, Rebeca Grynspan, said: “To safeguard the world economy from future systemic crises, we must avoid the policy mistakes of the past and embrace a positive reform agenda.
“We need a balanced policy mix of fiscal, monetary and supply-side measures to achieve financial sustainability, boost productive investment and create better jobs. Regulation needs to address the deepening asymmetries of the international trading and financial system.”