Ukraine war, macro policy shifts cut global growth prospects by 1%

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Ukraine war global growth prospects
© UNICEF/Anton Skyba for The Globe and Mail | A man photographs an apartment building that was heavily damaged during escalating conflict, in Kyiv, Ukraine. Photo from UNCTAD website.
  • UNCTAD downgrades its global economic growth projection for 2022 to 2.6% from 3.6%
  • The Ukraine war is likely to reinforce a monetary tightening trend in advanced countries after similar moves began in late 2021 in developing countries 
  • UN body’s assessment of the war’s impact on trade and development confirms a deteriorating outlook for world economy underpinned by rising food, fuel and fertilizer prices, global supply chain reconfigurations and mounting trade costs

Russia’s month-old invasion of Ukraine and changes in macroeconomic policies by countries in recent months have prompted the United Nations Conference on Trade and Development to downgrade its global economic growth projection for 2022 to 2.6% from 3.6%.

In its “Trade and Development Report 2021 Update” published on 24 March, UNCTAD says while Russia will experience a deep recession this year due to sanctions, significant growth slowdowns are expected in parts of Western Europe and Central, South and Southeast Asia.

The Ukraine war that began when Russia invaded on February 24 may reinforce a monetary tightening trend in advanced countries after similar moves in late 2021 in many developing countries due to inflationary pressures.

“The economic effects of the Ukraine war will compound the ongoing economic slowdown globally and weaken the recovery from the COVID-19 pandemic,” UNCTAD Secretary-General Rebeca Grynspan said.

“Many developing countries have struggled to gain economic traction coming out of the COVID-19 recession and are now facing strong headwinds from the war. Whether this leads to unrest or not, a profound social anxiety is already spreading.”

UNCTAD recommends the following policy actions to protect the global economy:

  • Greater concessional and less conditional, multilateral financial support for developing countries to help them withstand financial and economic shocks and increase investment
  • Immediate debt relief for Ukraine and renewed talks on a multilateral mechanism for fair and orderly restructuring of developing country sovereign debt in times of financial stress.
  • More use of Special Drawing Rights to supplement official reserves and to provide liquidity on a timely basis to avoid severe deflationary adjustments.
  • More effective and less ad hoc swap arrangements between central banks to support developing country currencies.
  • Sector-specific policies including price controls and subsidies, to tackle the supply-side and mark-up pressures on inflation.

UNCTAD worried that weakening global demand, insufficient policy coordination at the international level and high debt levels due to the pandemic will generate financial shock waves that can push some developing countries into insolvency, recession and arrested development.

UNCTAD’s assessment of the impact of war in Ukraine on trade and development confirmed a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertilizer prices, heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs.

The Ukraine war has further driven up global prices of energy and primary commodities, stretching household budgets and raising production costs, while disruptions to trade and the impact of sanctions are likely to have a chilling effect on long-term investment.

UNCTAD said soaring food and fuel prices will immediately hit the most vulnerable in developing countries, leading to hunger and hardship for households who spend the highest share of their income on food. But everyone will ultimately feel the loss of purchasing power and real spending.

Of growing concern are the uncertainties generated by the war in key markets: an environment of volatile capital flows, exchange rate instability and rising borrowing costs, particularly for least developed and middle-income developing countries, with the risk of serious external debt payment difficulties, UNCTAD said.

The report warns that rate hikes in advanced economies, alongside disorderly movements in global financial markets, could prove a devastating combination for developing economies. It said volatility in commodity, currency and bond markets, as investors seek out safe havens, have already triggered capital flight. 

Developing country bond yields have been on the rise since last September. Since the Ukraine crisis began, developing countries’ yields have risen further 36 basis points, on average, with countries heavily dependent on food imports experiencing higher increases.

The report points to short-term public debt servicing needs as a growing concern. Developing countries are projected to require US$310 billion to meet external public debt service requirements in 2022 – equivalent to 9.2% of the outstanding stock of external public debt at the end of 2020.

Countries that appear vulnerable to a sudden stop due to a combination of large rollover pressures and a large debt service to export ratio include Pakistan, Mongolia, Sri Lanka, Egypt and Angola. Three of these, Pakistan, Egypt and Angola, already have long-term IMF programs in place.