World economic growth is predicted to slow to 2.5% this year and then slip to 2.2% in 2023, leaving real GDP below its pre-pandemic trend, costing the world more than $17 trillion, according to UNCTAD.

In its Trade and Development Report 2022, the UN trade arm calls for more action to “calm commodity markets and address price speculation” as part of a suite of measures to sidestep a global recession and avoid prolonged stagnation which will hit global trade.

The prices of commodities – particularly food and energy – have climbed for most of the last two years, with the war in Ukraine only partly to blame; UNCTAD notes that “commodity markets have been in a turbulent state for a decade”.

While the United Nations’ Black Sea Grain Initiative – an agreement signed in July to allow the resumption of Ukrainian grain exports via the Black Sea – helped to lower prices.

In response to this, UNCTAD calls for governments to, one, include tighter commodity market regulation as part of their policy mix to curb price spikes, and two, deploy a pragmatic strategy, including price controls, anti-trust measures and windfall taxes on excessive corporate profits and to use those funds to support the most vulnerable.

The report warns that without making far-reaching monetary and fiscal policy moves in advanced economies, there is a real risk of worse damage being inflicted on the global economy than from the financial crisis in 2008 and the Covid-19 shock in 2020. Indeed, the hoped-for ‘soft landing’ for the global economy is already looking unlikely, said the report, as rapid interest rate increases and fiscal tightening in advanced economies compound the crises from the pandemic and the war in Ukraine.

“This year’s interest rate hikes in the United States are set to cut an estimated $360 billion of future income for developing countries (excluding China) and signal even more trouble ahead,” the report warned.

As a result, middle-income countries in Latin America, as well as low-income countries in Africa, are expected to show some of the sharpest slowdowns this year.

Asia powerhouse concerns

Of particular note, UNCTAD warned of significant deterioration of regional growth in Asia, which is projected to pick up in 2023 but with the caveat of downside risks from China’s greater-than-expected slowdown, the weakness of the global economy, and policy shifts in advanced economies.

“While the Asian region has exhibited relatively dynamic growth rates over the last decade, it’s by no means immune to … deteriorating global conditions.”

In East Asia, UNCTAD’s baseline scenario predicts an expansion of 3.3% this year, compared with 6.5% growth in 2021. For 2023, growth in the region is expected to increase to 4.3%. However, UNCTAD expects a “significant deceleration” in economic activity in China in 2022, to 3.9%.

“Although a moderation of the growth rate was to be expected relative to the dynamic recovery observed in 2021, the imposition of stringent lockdowns has resulted in a sharper deceleration than that initially envisaged, with the risks on the downside. Uncertainty is weighing on consumer spending, despite a loosening of credit conditions by the authorities, while the property sector is locked in an evolving financial crisis.”

In the Republic of Korea, growth is also expected to slow to 2.2% in 2022, slipping to 2% in 2023. While in South-East Asia, UNCTAD estimates better growth of 4.1% in 2022, but “growing inflationary pressures and a subsequent tightening of domestic monetary stances, along with more costly international financing conditions, is dampening activity”. South-East Asia’s growth rate is expected to slide to 3.8% in 2023.

Commodity yo-yo

Commodity markets, meanwhile, are expected to continue to be volatile, remaining high through 2022 and 2023 due to “a combination of slowing growth and dampening demand that will be offset by continued supply and transportation constraints, as disruptions resulting from the war are expected to have a long-term impact on the supply of raw materials from both the Russian Federation and Ukraine”.

But there’s still time to “step back from the edge of recession”, said UNCTAD secretary-general Rebeca Grynspan. “We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will. But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession.”

The root cause of the current inflation differs from developed to developing countries, and therefore requires a different response. Added to which, the Covid-19 recovery has been more inflationary for advanced economies than for developing countries, where inflation rates are structurally higher.

In developed countries, UNCTAD notes that inflation has been mostly driven by commodity prices – especially energy – and persistent bottlenecks in supply chains. While in developing countries, inflation has been largely driven by energy prices and exchange rate depreciation, which has made imports more expensive.

Instead, UNCTAD calls for a “course correction” in favour of policy measures targeting price spikes in energy, food, and other vital areas directly.

Marex Media