The United Nations Conference on Trade and Development (UNCTAD) has warned that the U.S. Federal Reserve’s rate hikes and a series of other central bank hikes could have a negative impact on the global economy. calculated that for every one basis point increase in the Fed, economic output in rich countries would decline by 0.5% and sales of all goods and services in poor countries would decline by 0.8% for three years.
UNCTAD Report Criticizes Central Bank Rate Hikes During Global Economic Downturn
Tighter monetary policy may not be a good idea, according to UNCTAD, a UN agency Founded in 1964, the organization was created to help developing countries strengthen global trade In its annualreport, UNCTAD notes that recent interest rate hikes by the U.S. Federal Reserve and many central banks around the world will reduce economic output in both rich and poor countries by 0.5% to 0.8% over three years.
The UNCTAD report notes that “unless current policy policies of monetary and fiscal tightening in advanced economies are quickly changed, the world is headed toward a global recession and prolonged stagnation.” UNCTAD forecasts that global economic growth will slow to 2.5% in 2022 and decline to 2.2% in 2023. The global slowdown will still leave real GDP below its pre-pandemic trend and cost more than $17 trillion, or nearly 20% of global income.”
The annual report immediately delves into central banks raising their benchmark lending rates and implementing tougher monetary policies; UNCTAD blames global economic woes on “supply-side shocks, declining consumer and investor confidence” and the “Ukraine-Russia war” It blames the crisis on “supply-side shocks, consumer and investor confidence” and “the war in Ukraine and Russia. The UN agency’s report explains that “despite this, major central banks have raised interest rates sharply, threatening to cut off growth altogether and making life much more difficult for heavily indebted businesses, households, and governments.”
UN agency urges governments to increase public spending and implement energy and food price controls
The report, authored by UNCTAD Executive Director Rebecca Grynszpan, finds that Latin American countries and certain regions in Africa may “experience the sharpest slowdown this year.” The average growth rate of developing economies is projected to be below 3%. This pace is insufficient for sustainable development and will put further pressure on public and private finances and damage employment prospects.” Grynspan details, “UNCTAD’s call to the Fed and the world’s central banks is similar to a complaint written by U.S. Senator Elizabeth Warren (D-Mass.).
Warren complained after the Fed raised the federal funds rate by 75 basis points (bps) on July 27. Warren used the news media outlet The Wall Street Journal (WSJ) to publish an opinion editorial stating that the U.S. central bank may cause a “catastrophic recession.” Warren further discussed the topic again on CNN’s “State of the Union” a few weeks after Fed Chair Jerome Powell presented his economic outlook at the 2022 Jackson Hole Economic Symposium. In a similar section, the Grinspan report detailed that “interest rate hikes by the developed world are hitting the most vulnerable the hardest.”
The UNCTAD report adds.
About 90 developing countries have seen their currencies weaken against the dollar this year, with a third of them weakening by more than 10%.
The UNCTAD report concludes by highlighting several ways world leaders can address the problem, one of which is to “increase public spending.” It also urges governments to implement “strategic price controls directly targeting energy, food, and other critical sectors.” The UN agency urges public and private managers to redirect more funds to green energy research and development. Finally, the UN agency wants world leaders to support theBlack Sea Grain Initiative. The Black Sea Grain InitiativeThis UN-led initiative would allow for the export of large quantities of food and fertilizer from Odessa, Chornomorsk, and Yuzhny in Ukraine.
Image Credits: Shutterstock, Pixabay, Wiki Commons, Editorial photo credit: Alexandros Michailidis / Shutterstock.com.