Global Economic Growth at Risk
The World Bank warned that the average potential global economic growth could drop to a three-decade low of 2.2% per year through 2030, potentially causing a "lost decade" for the world's economy. To avoid this, policymakers must implement ambitious initiatives to increase labor supply, productivity, and investment.
Repercussions of Slowed GDP Growth
Failing to reverse the expected slowdown in potential GDP growth could significantly affect the global ability to address climate change and reduce poverty, as detailed in a new World Bank report.
Strategies to Boost Potential GDP Growth
The report suggests that by focusing on sustainable sector investments, reducing trade costs, promoting growth in services, and expanding labor force participation, potential GDP growth could increase by up to 0.7 percentage points to 2.9%.
Preventing a Lost Decade
World Bank chief economist Indermit Gill stated that adopting policies that incentivize work, improve productivity, and accelerate investment could reverse the trend toward a lost decade for the global economy.
Monitoring the Banking Sector
The World Bank is closely watching developments in the banking sector as rising interest rates and tightening financial conditions increase borrowing costs for developing countries. Ayhan Kose, director of the World Bank's forecasting group, emphasized the potential for a sharper slowdown if another global financial crisis occurs, especially if accompanied by a recession.
Global Economy's "Speed Limit"
The average GDP growth rate serves as a "speed limit" for the global economy, indicating the maximum long-term rate at which it can grow without causing excess inflation.
Impact of Recent Crises
The report highlights how the COVID-19 pandemic and Russia's invasion of Ukraine have disrupted nearly three decades of sustained economic growth, contributing to concerns about slowing productivity, which is crucial for income growth and higher wages.
Low Investment and Slowing Growth
Low investment is expected to hinder growth in developing economies, with their average GDP growth projected to decrease to 4% for the rest of the 2020s, compared to 5% in 2011-2021 and 6% from 2000-2010.
Challenges for Developing Countries
The report indicates that rising productivity, higher incomes, and declining inflation have helped one out of four developing countries achieve high-income status in the past 30 years. However, these economic forces are now receding.
Policy Priorities for Growth
To alter the current trajectory, policymakers should focus on controlling inflation, ensuring financial-sector stability, and reducing debt. Additionally, promoting climate-friendly investments could contribute 0.3 percentage points to potential annual growth.
Boosting Trade Through Lower Costs
The report recommends lowering shipping, logistics, and regulation costs to increase trade. It also calls for changes to eliminate the bias toward carbon-intensive goods in many countries' tariff schedules and to remove restrictions on access to environmentally friendly goods and services.
Digital Services and Labor Force Participation
Expanding exports of digital services could lead to substantial productivity gains. Furthermore, increasing labor force participation rates for women and other groups could raise global potential growth rates by as much as 0.2 percentage points per year by 2030.