Average potential global economic growth would fall to a three-decade low of 2.2% annually until 2030, setting up a “lost decade” for the global economy, the World Bank warned Monday, if policymakers do not undertake ambitious initiatives to improve labor supply, productivity, and investment.
“A lost decade could be in the making for the global economy,” said World Bank chief economist Indermit Gill, although he said policies that incentivize work, increase productivity, and accelerate investment could reverse the trend.
Failing to reverse an expected, wide-based slowdown in potential gross domestic product (GDP) growth would have deep implications for the world’s capacity to address climate change and alleviate poverty, it said in a new report.
But concerted efforts to increase investments in sustainable sectors, reduce trade costs, harness service-sector growth, and increase labor force participation could increase potential GDP growth by as much as 0.7 percentage points, to 2.9%, the report said.
The World Bank is also monitoring developments in the banking sector as rising interest rates and tightening fiscal conditions increase the cost of borrowing for developing countries, World Bank projections team Director Ayhan Cose told reporters. The GDP average growth rate is something of a “speed limit” for the world economy, indicating the highest rate over the long run at which it can grow without sparking further inflation.
The overlapping crises of recent years, including the COVID-19 pandemic and the Russian incursion into Ukraine, ended almost three decades of steady economic growth, adding to growing concerns over sluggish productivity, essential to rising incomes and higher wages, the report said.
As a result, the median potential growth in GDP is projected to fall to 2.2% over the period 2022-2030, compared with 2.6% over the period 2011-21, and is almost one-third lower than the 3.5% pace seen over the period 2000-10.
Lower investment drags on growth in developed economies, whose average GDP growth declined to 4% over the 2020s, a decline from the 5% of 2011-2021 and 6% over 2000-2010.
Rising productivity, higher incomes, and falling inflation led one out of every four developing countries to achieve high-income status over the past three decades, the report said.
With these economic forces now retreating, productivity is likely to grow at the slowest pace since 2000, investment growth in 2022-24 will be half of what it has been in the past 20 years, and international trade is increasing at a far slower pace, it said.
“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 weigh on growth prospects for years, Ayhan Kose, director of the World Bank’s forecasting group, told reporters.