Global economic growth to slump to three-decade low by 2030, World Bank says

World economy to hit 'speed limit' — the maximum long-term rate at which it can grow without sparking inflation — amid banking crises and recessions

Investment growth is weakening, with the 2022-24 average expected to be half that of the previous two decades, the World Bank said. Reuters

The global economy is set to reach its “speed limit” — the maximum long-term rate at which it can grow without risking excess inflation — and slump to a three-decade low by 2030, according to the World Bank.

Systemic banking crises and recessions are expected to have lasting effects on the world's economic growth and development.

Between 2022 and 2030, the average global potential gross domestic product growth is predicted to decline to 2.2 per cent a year, down by about a third from the 3.5 per cent growth rate during the first decade of this century, the Washington-based lender said in its latest report on Monday.

For developing economies, the decline will be equally steep, dropping to 4 per cent annually over the remainder of this decade from 6 per cent a year between 2000 and 2010.

These declines will be much steeper if these countries face a global financial crisis or a recession, the multilateral lender warned.

“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.

The warning comes amid a tough macroeconomic climate as banking crises in the US and Switzerland and the pivot to higher interest rates to fight inflation have increased risks to financial stability, according to the International Monetary Fund.

High inflation, the impact of the Ukraine-Russia war and elevated global debt levels continue to pose risks for the global economy.

However, the long-term global economic decline expected by the World Bank is reversible, it said.

“The global economy’s speed limit can be raised — through policies that incentivise work, increase productivity and accelerate investment,” Mr Gill said.

An ambitious policy push is needed to boost productivity, increase the labour supply, ramp up investment and trade, and harness the potential of the services sector, the World Bank report said.

Potential GDP growth can be increased by as much as 0.7 percentage points — to an annual average rate of 2.9 per cent — if countries adopt sustainable and growth-orientated policies, it said.

This 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, 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 co-operation and a re-energised push to mobilise private capital.”

“An extraordinary series of setbacks has brought the world to another crossroads. It will take an exceptional mix of focused policies and effective international co-operation to revive growth,” David Malpass, the World Bank's President, said in the report's foreword.

The report highlighted specific policy actions at the national level to help boost long-term growth prospects.

First, it recommended that countries align their monetary, fiscal and financial policies to moderate the ups and downs of business cycles. Policymakers should prioritise taming inflation, ensuring the stability of the financial sector, reducing debt, and restoring fiscal prudence. This can help countries attract investment by boosting investor confidence in national institutions and policies, the report said.

Secondly, it urged countries to ramp up investment in areas such as transportation, energy, climate-friendly agriculture, manufacturing and land and water systems. Investments aligned with key climate goals could improve potential growth by up to 0.3 percentage points per year and strengthen resilience to natural disasters in the future, it said.

Thirdly, countries should slash trade costs — mostly related to shipping, logistics and regulations — which can 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 trade-facilitation measures, the World Bank said. It added that trade costs can be reduced in climate-friendly ways — by removing the current bias towards carbon-intensive goods found in many countries’ tariff schedules and by removing restrictions on access to environmentally-friendly goods and services.

Fourthly, nations must consider capitalising on the services sector, which 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 per cent of total services exports in 2021, from 40 per cent in 2019. The shift could generate important productivity gains if it results in better delivery of services, the lender said.

Finally, countries should aim to increase labour force participation: About half of the expected slowdown in potential GDP growth through 2030 will be due to changing demographics — including a shrinking working-age population and declining labour force participation as societies age.

Boosting overall labour force participation rates could increase global potential growth rates by as much as 0.2 percentage point a year by 2030, the report said.

In some regions — such as South Asia and the Middle East and North Africa — increasing female labour force participation rates to the average for all emerging market and developing economies could accelerate GDP growth by as much as 1.2 percentage points a year between 2022 and 2030, the World Bank said.