Average potential global economic growth will plummet to a three-decade low of 2.2% per year through 2030
The potential growth of the global economy until the end of the decade has slowed to the weakest level in 30 years, the World Bank said, citing the consequences of the covid-19 pandemic and the conflict in Ukraine.
The “speed limit” of the global economy, or the highest long-term rate at which it can grow without triggering inflation, will be reduced between 2022 and 2030 to 2.2% a year, the organization said. “A lost decade could be in the making for the global economy,” said Indermit Gill, chief economist and senior vice president for development economics at the World Bank.
“The ongoing decline in potential growth has serious implications for the world’s ability to cope with the growing array of challenges unique to our time: stubborn poverty, divergent incomes, and climate change,” Gill notes.
The silver lining of the multilateral development bank report is that potential growth could be as high as 2.9%, marking an acceleration if policymakers put in place the right plans to boost productivity and labor supply and prop up investment.
The latest World Bank research takes place against the backdrop of a fragile global economy still reeling from Russia’s war in Ukraine and efforts to reopen after the darkest days of the covid pandemic. Many economies, including China, are grappling with ongoing demographic crises that have meant a mad scramble for policies that promote more childbearing or push back the retirement age, as France recently demonstrated.
The report’s analysts say things could get worse, with further declines in potential growth if a global financial crisis or recession materializes. Among the authors’ specific policy prescriptions for halting this decline in potential growth:
Labor shock absorbers Demographic
Changes—a smaller pool of workers and lower labor participation rates as many societies age—are subject to about half of the expected slowdown in potential growth through 2030.
The authors specifically mention economies where female labor participation lags, estimating that some in South Asia, the Middle East, and North Africa could increase their potential growth by 1.2 percentage points a year in 2022. -30 if they raise those rates to the average for emerging markets and developing economies.
After the pandemic, it has become a familiar siren song: governments and central banks must work more closely to ensure their efforts do not conflict, especially amid still-high inflation. The World Bank report calls for reining price growth, building financial sector stability, and reducing debt to restore investor confidence.
According to the report, governments need to put more money to work on projects and especially pay attention to climate risk mitigation, including transport, energy, agriculture, and land and water systems. The authors estimate that doing so could provide a cushion of 0.3 percentage points per year to potential growth.
As they push for more trade liberalization and pacts, World Bank analysts have called on countries with the highest shipping and logistics costs to cut them in half, including through procedural changes. Customs and border clearances have acted as an effective additional fee. Transit delays are shown to be quite costly, with each day of transportation equaling a 0.8% tax, according to independent research the report cites.
The authors note that trade cost discounts can be achieved in a climate-friendly way, for example, by removing any bias in favor of carbon-intensive goods in countries’ tariffs.
The report heralded the services sector as potentially “the new engine of economic growth,” pointing to a Covid-era surge in digital services related to information and communications technology exports to more than half of all service exports in 2021, from 40% just two years earlier. That’s a boon for productivity, analysts write, and developing economies should especially look to bolster education and associated training.