In an update to its Trade and Development report published Thursday, March 25, UNCTAD said the one percent reduction in global growth is largely driven by the Ukraine war and the changes in macroeconomic policies made by countries in recent months.
“The ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021 in several developing countries due to inflationary pressures, with expenditure cuts also anticipated in upcoming budgets,” UNCTAD 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.”
Coming just as pandemic-induced disruptions seemed to subside, the geopolitical crisis has dealt a blow to confidence domestically. “The added pressure of price increases is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a sharper than expected slowdown in growth,” the UNCTAD report says.
Of growing concern, the report added, are the uncertainties generated by the war in key international 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.
The report warns that traditional financial indicators such as current account positions and foreign reserves do not give a full picture of the vulnerability to changing external financial conditions. Measures of financial integration are a better gauge with many large developing economies vulnerable to sudden reversals in financial flows.