World Economy Is In “Lost Decade”: World Bank

The global economy confronts a “lost decade” as nearly all drivers of economic progress in recent history fade, according to the World Bank.

The World Bank's staff warned on 27 March in a report titled 'Falling Long-Term Growth Prospects: Trends, Expectations, and Policies' that the global economy's ‘speed limit’ is on track to fall to a three-decade low by 2030.

The speed limit' alludes to the maximum long-term growth rate that can be achieved without raising inflationary concerns.

“In the decade preceding Covid-19, a global slowdown in productivity...was already adding to concerns about long-term economic prospects,” the report said, adding that investment growth is slowing, the global labour force is growing slowly, the coronavirus pandemic has triggered human capital reversals, and growth in international trade is barely matching GDP growth.

“The result could be a lost decade in the making, not just for some countries or regions, as has previously occurred, but for the entire world. Without a significant and wide policy push to revitalise it, the global average potential GDP growth rate...is projected to decline to a three-decade low of 2.2 per cent per year between now and 2030, down from 2.6 per cent in 2011-21,” according to the study.

The global average potential GDP growth rate of 2.2 per cent would be significantly lower than the 3.5 per cent reported in the first decade of the century.

According to outgoing World Bank President David Malpass, reviving growth in a world hit by “an extraordinary series of setbacks” will require “an exceptional mix” of policies and international collaboration.

The impact of weakening growth drivers is anticipated to be felt most strongly by developing countries, with their average annual potential GDP growth projected to fall to 4 per cent this decade from 6 per cent between 2000 and 2010.

“These declines would be much steeper in the event of a global financial crisis or recession,” according to the study.

However, not all is lost, as the report recommends specific policy changes to support long-term growth. These include, among other things, the alignment of monetary, fiscal, and financial frameworks to smooth the ups and downs of business cycles, with an emphasis on taming inflation and lowering debt.

According to the report, “sound” investments aligned with climate objectives could boost annual potential development by up to 30 basis points.

A basis point is equal to one-tenth of a percentage point.

Other measures suggested by the report included lower trade costs, focusing on the services sector as the “new engine” of economic development, and increasing labour force participation, as well as increased global cooperation.

“International economic integration has contributed to global prosperity for more than two decades, but it has stalled. Restoring it is critical to catalyse trade, accelerate climate action, and mobilise the investments required to achieve the SDGs,” the study added.