Priority economies face pressure from inflation and policy shifts that may accelerate, rather than ease, a downturn. An inflationary squeeze paired with rate hikes and tax adjustments could intensify the slowdown, raising the risk of sovereign stress for multiple governments.
An extraordinary group of economists from the United Nations convened this Monday to review whether current measures will truly avert a fresh global economic crisis. The assessment concludes that the major central banks’ actions have edged the world closer to dangerous territory.
Rebeca Grynspan, head of UNCTAD, warned that the global economy could be teetering on the brink of recession due to policy choices. The danger is real: the downturn could exceed the severity of the 2008 financial collapse and the Covid-19 crisis, accompanied by social costs that push millions into poverty.
Policy makers have pursued inflation relief through tight monetary policy, hoping a soft landing would be possible. Yet the report suggests the cure could be worse than the disease if growth is squeezed too hard for too long.
The impact of higher interest rates
The UNCTAD analysis finds that governments appear to be repeating past mistakes, failing to break the inflationary cycle without triggering deeper crises as seen in the 1970s and 1980s.
Experts argue that it is unwise to expect a price drop without risking a recession when high interest rates are in play.
projections indicate that rising US interest rates could reduce future revenues in developing economies by about $360 billion, excluding China.
The report also highlights a risk of debt distress spreading to developing nations. Today, roughly half of low-income countries and about one-third of middle-income countries carry substantial debt burdens.
Another facet of this crisis is its universal reach. No region is immune, and the impact will be disproportionately harsher for countries with fewer resources.
Growth projections
UNCTAD estimates global growth around 2.5 percent for the year, with a softer outlook in 2025 at roughly 2.2 percent. The trajectory remains below IMF expectations of about 2.8 percent.
Inflation is explained as being reinforced by price increases from firms and speculative activity in energy markets that seek wider margins amid the global recovery after pandemic-related disruptions have faded.
Inflation concerns are substantiated by data showing 69 countries with a population of about 2.1 billion posted double-digit inflation in June, compared with 23 countries a year earlier.
UNCTAD notes that modest changes in interest rates will have limited impact on these inflation drivers and may instead trigger sharper corrections in commodity prices, assets, including cryptocurrencies, and in real estate and metals markets.
Governments are urged to explore alternative inflation-containment tools, such as targeted price controls in strategic sectors, regulation of speculative trades in sensitive markets, debt relief programs, and targeted support for the most vulnerable populations.