The April 2024 update of the Trade and Development Report by the United Nations Conference on Trade and Development (UNCTAD) highlights the challenges facing the global economy, including inflation, debt, and slow growth. Despite some positive economic indicators in 2023, the report warns of significant risks ahead, particularly for developing countries.
The global economy grew by 2.7 percent in 2023, narrowly avoiding a severe slowdown. Key players like China, India, Indonesia, Russia, and the United States managed to sidestep financial troubles that loomed large at the beginning of the year. However, the positive momentum is at risk of being wasted. Policymakers are focusing heavily on inflation control and monetary easing, overshadowing critical issues such as trade disruptions, climate change, low growth, underinvestment, and rising inequalities.
Looking ahead, UNCTAD projects a slight slowdown to 2.6 percent growth in 2024. This marks the third consecutive year of post-pandemic deceleration. The current growth trend is primarily driven by private consumption outpacing income, which is likely financed by debt as pandemic savings dwindle. This heavy reliance on debt accumulation creates a precarious balance between financial market stability and other macroeconomic goals, resulting in insufficient public funding and low private investment.
The Ripple Effects of Monetary Tightening
Central banks in advanced economies, including the US Federal Reserve, the European Central Bank, and the Bank of England, initiated an aggressive cycle of monetary tightening in early 2022 to combat inflation. This synchronized effort saw significant interest rate hikes, with cumulative increases of up to 500 basis points. The policy aimed to dampen demand but largely ignored the supply-side bottlenecks and rising markups due to market concentration and geopolitical tensions.
This monetary tightening had global repercussions. Developing countries faced higher debt servicing costs, currency depreciations, and increased local food prices. Many central banks in these countries had to raise interest rates to retain capital, adversely impacting domestic demand and investment. Despite some easing in monetary policy, concerns over wage growth persist, even though real wages have not kept pace with labor productivity.
International Trade and Sovereign Debt Woes
Global merchandise trade contracted by about 1 percent in 2023, marking the first annual decline in four decades despite economic growth. Trade tensions, subdued global demand, and disruptions in key maritime routes like the Panama Canal and the Red Sea contributed to this unprecedented contraction. In contrast, trade in services showed more dynamism, particularly in travel and telecommunications.
The sovereign debt crisis continues to plague developing countries. In 2022, these countries experienced net negative resource transfers on public debt, paying nearly $50 billion more in debt service than they received in new disbursements. This decline reflects private creditors' diminishing appetite for lending. While sovereign bond issuance by developing countries saw a strong start in 2024, market access remains uneven and costly, highlighting the structural nature of debt challenges.
Regional Developments: Mixed Fortunes
Africa: Africa's growth remains subdued, projected at 3.0 percent in 2024, hindered by weak performances in major economies like Nigeria, Egypt, and South Africa. External factors such as weak export demand and high borrowing costs exacerbate these challenges. Inflation remains high, particularly affecting vulnerable households. However, countries like Benin, Côte d'Ivoire, and Rwanda show stronger growth due to robust public investment.
America: The Americas are expected to grow by 1.8 percent in 2024. Argentina faces severe inflation and debt renegotiation issues, while Brazil and Mexico contend with external pressures and fiscal constraints. The United States experienced a soft landing in 2023 but faces high household debt and potential financial risks in 2024.
Asia: Asia's growth is projected at 4.0 percent in 2024, with strong performances in China and India. China's growth is supported by fiscal and monetary measures, while India's growth is driven by public investment and strong service sector demand. Other countries like Indonesia show resilience, while Japan and Korea face slower growth due to domestic and external challenges.
Europe and Oceania: Europe's growth remains weak, with modest projections for major economies like France, Germany, and Italy. External factors, fiscal constraints, and subdued domestic demand contribute to this outlook. Australia continues to experience low growth, with projections for 2024 reflecting ongoing economic challenges.
The "Trade and Development Report Update - April 2024" underscores the complex and interconnected challenges facing the global economy. It calls for coordinated policy efforts to address critical issues like debt, investment, and sustainable development, ensuring a balanced and resilient global economic future.