Advanced economies need to change course on monetary policy, as central bank tightening could be sparking a global recession. The idea that central banks can lower inflation with more rate hikes and avoid a recession is “an imprudent gamble,” a UN trade group said. The group trimmed its growth estimates for the global economy this year, and expects an even bigger slowdown in 2023. Loading Something is loading.
Advanced economies need to change course on their monetary policy, as central bank tightening could be sparking a global recession, according to a United Nations trade group.
“Excessive monetary tightening could usher in a period of stagnation and economic instability,” the United Nations Conference on Trade and Development warned in a statement on Monday, shortly after releasing a report on growing recession risks.
In the report, the UN group trimmed its growth estimates for the global economy from 2.6% to 2.5% this year, and expects an even bigger slowdown in 2023, with just 2.2% growth next year.
“Any belief that [central bankers] will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble,” the group added.
That’s largely due to global inflationary forces, with nations being rocked by soaring energy prices amid Russia’s war on Ukraine as well as lingering supply-chain issues from the pandemic. Eurozone inflation touched a record 10% last week despite a series of aggressive rate hikes from the European Central Bank, and US inflation also remains stubborn to Fed policy, only cooling slightly to 8.3% in August.
It’s supporting the case for more aggressive hikes to come from major economies, as central bankers scramble to get inflation back down to target levels. But the level of tightening needed to rein in prices risks screeching the global economy to a halt, the UN report warned. That particularly applies to the Fed and other advanced economies, as the dollar and euro encompass large chunks of world trade and debt volume.
“What does seem likely is that the impact of Fed tightening will be more severe for vulnerable emerging economies with high public and private debt,” the report said, calling a debt crisis a “very real possibility” for developing countries.
It echoes warnings from other experts who have sounded global recession alarms as central banks attempt to undo the damage from ultra-loose monetary policies during the pandemic.
Top economist Nouriel Roubini warned on Monday there are signs that a debt crisis has already started, and a hard landing of the economy before the end of the year is now the baseline scenario.
Noble laureate Paul Krugman has also warned that the Fed’s rate hikes could have an outsized effect on the global economy.