According to a newly released report from the World Bank, the average potential global economic growth is expected to drop to 2.2% per year through 2030, marking a three-decade low.
The report, published on Monday, highlights that the global economy’s maximum long-term growth rate without triggering inflation will be lower than it has been for the past 30 years. In order to counter this trend, the report suggests an ambitious policy approach aimed at increasing productivity and labor supply, expanding investment and trade, and harnessing the potential of the services sector.
The report identifies a worrying trend in which the forces that have driven progress and prosperity over the past three decades are losing their effectiveness. If a global financial crisis or recession were to occur, the expected decline in global potential GDP growth, which is projected to be around one-third of the rate that prevailed in the first decade of this century, would be much steeper. Developing economies are predicted to experience an equally sharp decline, dropping from 6% to 4% per year, according to WAM.
“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.”
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 reenergised 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 highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects:
Align monetary, fiscal, and financial frameworks: Policymakers can moderate the fluctuations of business cycles by implementing strong macroeconomic and financial policies. Prioritizing measures such as ensuring financial sector stability, taming inflation, reducing debt, and restoring fiscal prudence can boost investor confidence in national institutions and policymaking, thereby attracting investment to the country.
Ramp up investment: Investments that are aligned with key climate goals in sectors such as transportation and energy, climate-smart agriculture and manufacturing, and land and water systems can boost potential growth by up to 0.3 percentage point per year. Moreover, such investments can increase resilience to natural disasters in the future.
Trade costs—mostly associated with shipping, logistics, and regulations—effectively double the cost of internationally traded goods today. Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade-facilitation and other practices of countries with the lowest shipping and logistics costs. Trade costs, moreover, can be reduced in climate-friendly ways—by removing the current bias toward carbon-intensive goods inherent in many countries’ tariff schedules and by eliminating restrictions on access to environmentally friendly goods and services.
Capitalise on services: The services sector could become the new engine of economic growth. Exports of digitally delivered professional services related to information and communications technology climbed to more than 50% of total services exports in 2021, up from 40%in 2019. The shift could generate important productivity gains if it results in better delivery of services.
Increase labor force participation: About half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics—including a shrinking working-age population and declining labor force participation as societies age. Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030. In some regions—such as South Asia and the Middle East and North Africa—increasing female labor force participation rates to the average for all emerging market and developing economies could accelerate potential GDP growth by as much as 1.2 percentage points a year between 2022 and 2030.
The report also underscores 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.
