UNCTAD warns of recessionary conditions as global economic growth seen falling below 2.5%

D Ravi Kanth Geneva | Updated on March 10, 2020


As stock markets collapsed on Monday amid fears of enveloping recessionary conditions due to the novel corona virus or Covid-19, the global economic growth is expected to fall below 2.5 per cent, the United Nations Conference for Trade and Development (UNCTAD) warned in its Trade and Development Report update.

A drop to the tune of 2.5 per cent in global economic growth is reckoned as the recessionary threshold for the world economy, the update has suggested.

In its 12-page update issued by the TDR, it is argued that Covid-19 remains a “public health threat” as well as “an economic threat.” “The resulting hit to global income with what forecasters had been projecting for 2020 will be around the trillion-dollar mark” and it could be even worse.

According to the TDR update, “the duration and depth of the crisis will depend on three variables: how far and fast the virus spreads, how long before a vaccine is found, and how effective policy makers will be in mitigating the damage to our physical and economic health and well-being.”

There is also a fourth variable arising from “the uncertainty surrounding each of these variables” that is adding “to people’s sense of anxiety,” it says, suggesting that “ losses of consumer and investor confidence are the most immediate signs of spreading contagion.”

Worse still, “a combination of asset price deflation, weaker aggregate demand, heightened debt distress and a worsening income distribution could trigger a more vicious downward spiral.” Consequently, “widespread insolvency and possibly another “Minsky moment”, a sudden, big collapse of asset values which would mark the end of the growth phase of this cycle cannot be ruled out,” the update has warned.

In a succinct analysis of the current economic and financial situation, UNCTAD’s director of Globalisation and Development Strategies, Richard Kozul-Wright,has warned the world is settling for “the new abnormal” of “sluggish growth, extreme inequality and recurrent shocks.”

He says : “a spluttering recovery in the North and a general slowdown in the South have been hanging ominously over the global economy since the 2008-9 financial crisis; combined with heightened market volatility, a fractured multilateral system and diminished room for policy manoeuvre, the past decade has been marked by a growing sense of economic anxiety.

“Behind this lies a more prolonged period of sluggish investment and growth, punctuated by intermittent booms and busts, and underpinned by rapid private debt accumulation, stable prices and low interest rates, which emerged well before the financial crisis in the advanced economies and has characterised much of the rest of the global economy since then,” says Kozul-Wright, a leading economist on globalisation.

More disturbingly, he says, “sluggish growth and a heightened economic anxiety have been closely associated with an unprecedented rise in inequality, across almost all countries, reflecting a combination of wage suppression, corporate rentierism and wealth concentration.”

Little wonder that “financial boom-bust cycles generated by attempts to overcome sluggish growth by monetary easing and financial deregulation has exacerbated the inequality-stagnation nexus by creating waste and distortions on the supply side and reducing potential growth.”

The emergence of the “gig economy” is a result of the manner in which “financial sector tends to crowd out real economic activity,” as “cheap credit misallocates capital, diverting resources to low-productivity sectors such as real estate and personal services in the “gig economy”.

“The resulting misallocation of resources is exposed during crises,” including the current crisis, with “public and private aggregate debt levels in many developing countries already are at elevated, and in several cases acute, distress levels.”

"While the recent explosion of corporate debt, much of it of low credit quality, poses the most immediate danger in advanced economies, developing countries face a range of fast deepening financial and debt vulnerabilities that do not bode well for their ability to withstand another external shock, Kozul-Wright said.

China also has become a crucial source of longer-term borrowing for developing countries and if its lending conditions tighten with the slowdown, those with strongest financial links to China, might be amongst the slowest to recover from the economic impact of the Covid-19 crisis.

According to the update, “a preliminary downside scenario sees a $2-trillion shortfall in global income with a $220 billion hit to developing countries (excluding China).

The analysis points out that a persistent belief in the soundness of economic fundamentals and a self-correcting world economy continues to hamper policy thinking in the advanced economies. “This will stymie the bolder policy interventions needed to prevent the threat of a more serious crisis and increases the chances that recurrent shocks will cause serious economic damage in the future,” Kozul-Wright added.

In short, time has come for governments to adopt “appropriate macroeconomic policy response”, particularly “aggressive fiscal spending with significant public investment, including into the care economy, and targeted welfare support for adversely affected workers, businesses and communities, the analysis argues. International coordination of these programmes will be required.”

Ultimately, says Kozul-Wright, “a series of dedicated policy responses and institutional reforms are needed to prevent a localised health scare in a food market in Central China from turning in to a global economic meltdown. “

Published on March 10, 2020

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