The global economy’s “speed limit”—the maximum long-term rate at which it can grow without sparking inflation—is set to slump to a three-decade low by 2030.
In a new report titled: Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, the World Bank noted that systemic banking crises and recessions put together will have lasting effects on global growth and development.
According to the report, 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,” the report said.
World Bank’s Chief Economist and Senior Vice President for Development Economics, Indemirmit Gill said “A lost decade could be in the making for the global economy. 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 report offers a 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 added.
“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth. 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 mobilize private capital,” said Ayhan Kose, Director of the World Bank’s Prospects Group. “
Franziska Ohnsorge, manager at the World Bank’s Prospects Group noted that “Recessions tend to lower potential growth. Systemic banking crises do greater immediate harm than recessions, but their impact tends to ease over time.”