New warnings of economy’s lost decade amid fiscal headwinds

The World Bank’s chief economist has warned that there is the real risk of a “lost decade” for the global economy as future output growth threatens to slump.

The bank has issued a new report  which says the global economy’s “speed limit”, the maximum long-term rate at which it can grow without sparking inflation, is set to crash to a three-decade low by 2030. It added an  ambitious policy push is needed to boost productivity and the labour supply, ramp up investment and trade, and harness the potential of the services sector, a new World Bank report shows.

The report, Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, provides 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. These rates can be thought of as the global economy’s “speed limit.”

The report found nearly all the economic forces that powered progress and prosperity over the last three decades are fading. As a result, 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% a year. For developing economies, the decline will be equally steep: from 6% a year between 2000 and 2010 to 4% 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.

“A lost decade could be in the making for the global economy,” said Indermit Gill, the World Bank’s chief economist and senior vice president for Development Economics. “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. But this decline is reversible. The global economy’s speed limit can be raised—through policies that incentivize work, increase productivity, and accelerate investment.”

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%, if countries adopt sustainable, growth-oriented policies. That would convert an expected slowdown into an acceleration of global potential GDP growth.

“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth,” said Ayhan Kose, a lead author of the report and director of the World Bank’s Prospects Group. “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 mobilise private capital.”

The report lays out an extensive menu of achievable policy options, breaking new ground in several areas. It introduces the world’s first comprehensive public database of multiple measures of potential GDP growth—covering 173 economies from 1981 through 2021. It is also the first to assess how a range of short-term economic disruptions, such as recessions and systemic banking crises, reduce potential growth over the medium term.

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

The report underscored the need to strengthen global cooperation. 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 catalyse trade, accelerate climate action, and mobilise the investments needed to achieve the Sustainable Development Goals.

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