Global economy’s “speed limit” set to fall to three-decade low – World Bank

The global economy’s “speed limit” is set to fall to a three-decade low by 2030, the World Bank has said.

The bank, in its report titled “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” said the global potential growth rate, the maximum rate at which an economy can grow without igniting inflation, is expected to fall to a three-decade low over the remainder of the 2020s.

The report offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine. It introduced the world’s first comprehensive public database of multiple measures of potential Gross Domestic Product (GDP) growth covering 173 economies from 1981 through 2021.

According to the report, nearly all the forces that have powered growth and prosperity since the early 1990s have weakened, partly because of a series of shocks to the global economy over the past three years.

It said the growth rates of investment and productivity are declining just as the global labour force is ageing and expanding more slowly.

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It added that the growth of international trade is much weaker now than it was in the early 2000s, noting that the slowdown could be even more pronounced if financial crises erupt in major economies and spread to other countries as these types of episodes often lead to lasting damage to potential growth.

As a result, the report said between 2022 and 2030, average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century to 2.2 per cent a year.

“For developing economies, the decline will be equally steep from 6 per cent a year between 2000 and 2010 to 4 per cent a year over the remainder of this decade. These declines would be much steeper in the event of a global financial crisis or a recession,” it said.

Policy Response

The World Bank said these challenges call for an ambitious policy response at the national and global levels.

“The slowdown can be reversed by the end of the 2020s if all countries replicate some of their best policy efforts of recent decades and accompany them with a major investment push grounded in robust macroeconomic frameworks.

“Boosting human capital and labour force participation and making sound climate-related investments can also make a measurable difference in lifting growth prospects,” the bank said.

It added that bold policy actions at the national level will need to be supported by increased cross-border cooperation and substantial financing from the global community.

However, the bank said the analysis shows that potential GDP growth can be boosted by as much as 0.7 percentage points to an annual average rate of 2.9 per cent if countries adopt sustainable, growth-oriented policies.

The report also highlighted some specific policy actions that can make an important difference in promoting long-term growth prospects.

It said policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.

“Ramp up investment: In areas such as transportation and energy, climate-smart agriculture and manufacturing, and land and water systems.

“Cut trade costs mostly associated with shipping, logistics, and regulations, capitalize on services and increase labour force participation,” it said.

The report also underscores the need to strengthen global cooperation, adding that international economic integration has helped to drive global prosperity for more than two decades since 1990, but it has faltered.

“Restoring it is essential to catalyze trade, accelerate climate action, and mobilize the investments needed to achieve Sustainable Development Goals,” it said.

Franziska Ohnsorge, a lead author of the report and manager of the World Bank’s Prospects Group, said recessions tend to lower potential growth, adding that “Systemic banking crises do greater immediate harm than recessions”, but their impact tends to ease over time.

“A lost decade could be in the making for the global economy. The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times, stubborn poverty, diverging incomes, and climate change,” the World Bank’s Chief Economist and Senior Vice President for Development Economics, Indermit Gill said.

“But this decline is reversible. The global economy’s speed limit can be raised through policies that incentivize work, increase productivity, and accelerate investment,” he added..

A lead author of the report and Director of the World Bank’s Prospects Group, Ayhan Kose, said the world owes it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth.

“A bold and collective policy push must be made now to rejuvenate growth. At the national level, each developing economy will need to repeat its best 10-year record across a range of policies. At the international level, the policy response requires stronger global cooperation and a reenergized push to mobilize private capital,” he added.