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World Bank warns of ‘lost decade’ as global growth nears speed limit

Policymakers urged to adopt ambitious initiatives to boost labour supply, productivity and investment

Global economic growth is nearing a ‘speed limit’ and it could be a “lost decade in the making,” the World Bank has warned.

After three decades of mostly fast-paced growth, the global economy may finally be in for a big slow down with average potential global economic growth slumping to a three-decade low of 2.2 per cent per year through 2030, the global lender said in its latest forecast.

A number of economic risks, including an aging global workforce and declining private sector investment, are converging to limit economic growth. Unless policymakers adopt ambitious initiatives to boost labour supply, productivity and investment, the situation will usher in a “lost decade” for the world’s economy, the Washington-based lender said.

Failure to reverse the expected broad-based slowdown in potential gross domestic product growth would have profound implications for the world’s ability to tackle climate change and reduce poverty, said the report.

The World Bank report echoes the stark warning issued by International Monetary Fund Managing Director Kristalina Georgieva in the wake of the recent banking sector turmoil in advanced economies.

Speaking at a conference in Beijing, the IMF head said uncertainties in the world economy remained “exceptionally high”, with global economic growth expected to slow below 3.0 per cent this year because of the Ukraine war, “scarring” from the Covid-19 pandemic and monetary tightening. “Risks to financial stability have increased at a time of higher debt levels. The rapid transition from a prolonged period of low interest rates to much higher rates necessary to fight inflation inevitably generates stresses and vulnerabilities, as we have seen in recent developments in the banking sector,” Georgieva said.

According to the World Bank, for developing economies, the decline will be equally steep: from 6.0 per cent a year between 2000 and 2010 to 4.0 per cent 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 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 per cent—if countries adopt sustainable, growth-oriented policies. That would convert an expected slowdown into an acceleration of global potential GDP growth.

Ayhan Kose, a lead author of the report and director of the World Bank’s Prospects Group, said 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 re-energised push to mobilise private capital.”

“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.

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.