World Bank Cautions Of ‘Lost Decade’ In Global Growth Without Drastic Policy Shifts

Summary

• New financial crisis could cause “sharper” slowdown
• Boosting investment, reducing trade costs could reverse the trend
• Raising labor force participation would increase growth rate

Average potential global economic growth will fall to a 30-year low of 2.2% per year through 2030, ushering in a “lost decade” for the world’s economy, unless policymakers undertake ambitious initiatives to boost productivity, labor supply, and investment, the World Bank cautioned on Monday.

Failure to reverse the projected widespread slowdown in potential gross domestic product (GDP) growth would have significant implications for the world’s ability to combat climate change and reduce poverty, it said in a new report.

But joint efforts to increase investment in sustainable sectors, reduce trade costs, leverage growth in services, and expand labor force participation could increase potential GDP growth by up to 0.7 percentage points to 2.9%, the report said.

“A lost decade could be in the making for the global economy,” said World Bank chief economist Indermit Gill, although he said policies that boost productivity, incentivize work, and accelerate investment could reverse the trend.

The World Bank is also monitoring developments in the banking sector, which come as increasing interest rates and tightening financial conditions push up the cost of borrowing for developing countries, Ayhan Kose, director of the World Bank’s forecasting group, told reporters.

“The slowdown we are describing … could be much sharper, if another global financial crisis erupts, especially if that crisis is accompanied by a global recession,” Kose said, noting that recessions could hurt growth prospects for years.

The average GDP growth rate acts as a “speed limit” for the global economy, determining the maximum long-term rate at which it can grow without causing excess inflation.

This report said the super-imposed crises of the past few years, including the COVID-19 pandemic and Moscow’s invasion of Ukraine, had ended almost three decades of sustained economic growth, adding to exacerbating concerns about slowing productivity, which is crucial for income growth and higher wages.

As a result, average potential growth in GDP was projected to fall to 2.2% from 2022-2030, a drop from 2.6% in 2011-21, and nearly one-third lower than the 3.5% rate observed from 2000-2010.

Low investment will also weaken growth in developing economies, with their average GDP growth slumping to 4% for the rest of the 2020s, a decline from 5% in 2011-2021 and 6% from 2000-2010.

Rising productivity, declining inflation, and higher incomes helped one out of four developing economies achieve high-income status over the past 30 years, but those economic forces are now in retreat, the report said.

It said productivity was expected to increase at its slowest rate since 2000, investment growth in 2022-2024 would be half the rate observed over the past two decades and international trade was growing at a much slower pace.

To change the trajectory, policymakers should give precedence to containing inflation, reducing debt, and ensuring financial-sector stability, while encouraging climate-friendly investments that could add 0.3 percentage points to annual potential growth.

Reducing the costs associated with shipping, logistics, and regulations could increase trade, it said, calling for changes to eliminate the current bias toward carbon-intensive goods inherent in many countries’ tariff schedules and remove restrictions on access to environmentally sustainable goods and services.

Expanding exports of digital services could lead to significant productivity gains, while increasing labor force participation rates for women and others could raise global potential growth rates by as much as 0.2 percentage points annually by 2030.