A new report from the World Bank warns that the global economy’s “speed limit” — the maximum rate of long-term growth without causing inflation — is set to decline to its lowest point in three decades by 2030.
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, it said.
The report, titled ‘Falling Long-Term Growth Prospects: Trends, Expectations, and Policies,’ provides an extensive evaluation of potential output growth rates in the aftermath of two significant global events — the COVID-19 pandemic and the Russian invasion of Ukraine.
It presents a troubling observation — nearly all of the economic forces that have driven progress and prosperity in the past three decades are diminishing.
This decline is expected to result in a significant reduction in average global potential GDP growth between 2022 and 2030. Specifically, the expected decline is roughly one-third of the rate that prevailed during the first decade of this century, with an annual growth rate of 2.2 percent.
This trend is not limited to developed economies, as developing economies are also projected to experience a decline of equal magnitude, with an annual growth rate of 4 percent over the remainder of this decade compared to 6 percent between 2000 and 2010.
If a global financial crisis or a recession occurs, these declines could be even more severe.
This decline could lead to a lost decade for the global economy, impacting the world's ability to tackle poverty, climate change, and diverging incomes.
“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 incentivise work, increase productivity, and accelerate investment.”
Additionally, the study identifies policy options that could raise the global potential GDP growth rate from an expected 2.2 percent to 2.9 percent per annum, including sustainable growth policies, boosting investment in climate-smart infrastructure and reducing trade costs.
The report highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects:
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