Battered by the Covid-19 pandemic, the war in Ukraine and stubbornly high inflation, the global economy risks falling into a severe recession, especially if turmoil in the financial markets snowballs into a crisis, the World Bank says in a new report. Those immediate difficulties are compounding deep-rooted structural problems that threaten to drag on growth for years, leading to what could be a “lost decade” that permanently reduces the global economy’s long-term potential.
“Across the world, a structural growth slowdown is under way: At current trends, the global potential growth rate — the maximum rate at which an economy can grow without igniting inflation — is expected to fall to a three-decade low over the remainder of the 2020s,” the bank says.
The Washington, D.C.-based bank — founded at the 1944 Bretton Woods Conference that provided a blueprint for the post-war international financial order — estimates that the growth rate for the rest of the current decade will be just 2.2% per year, down from the 2.6% rate recorded between 2011 and 2021 and the 3.5% rate recorded between 2001 and 2011.
Ayhan Kose, the deputy chief economist at the World Bank, told the Financial Times that “the golden era of development appears to be coming to an end.” Kose said that the reduction in global growth potential “could be much sharper if another financial crisis erupts, especially if it is accompanied by another global recession.”
Saying that “nearly all the economic forces that drove economic progress are in retreat,” the bank noted that the cost of slower growth is considerable. Among other things, the pace of global poverty reduction will fall, as will investment in green energy infrastructure, making it that much harder to address the growing challenges of climate change. Lower growth also means less job creation and lower wage growth, which the bank says could provide “fertile ground for social tensions” within and between societies. And the growing load of debt around the world, both private and public, will become harder to manage, leading to greater financial stress.
Still, low growth is not inevitable, the bank says, and even small improvements can produce significant payoffs over a decade. That said, changing the current trajectory substantially will require “a Herculean collective policy effort to restore growth in the next decade to the average of the previous one.” The most promising approaches would be to boost labor force participation, especially among older workers and women, and to increase productive investment and trade.
The bank says that if governments work together to improve productivity and expand trade, global economic growth could increase by seven-tenths of a percentage point over the baseline, producing a growth rate of 2.9%. “That would convert an expected slowdown in potential GDP growth into an acceleration,” the bank says.