World Bank: Global Economy’s ‘Speed Limit’ Set to Fall to 30-Year Low

•Urges countries to align monetary, fiscal, financial frameworks

Ndubuisi Francis in Abuja

The global economy’s ‘speed limit’, the maximum long-term rate at which it can grow without sparking inflation, is set to slump to a three-decade low by 2030, the World Bank has stated in a new report, ‘Falling Long-Term Growth Prospects: Trends, Expectations, and Policies.’

This comes as the Organisation for Economic Development and Cooperation (OEDC) has explained that persistent inflationary pressures in services and cost pressures from tight labour markets would require many central banks in the world to maintain high policy rates until well into 2024.

In its latest report, the World Bank stated that an ambitious policy push was needed to boost productivity and the labour supply, ramp up investment and trade, and harness the potential of the services sector.

The report, which offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine, noted that these rates could be thought of as the global economy’s “speed limit.”

It laid out an extensive menu of achievable policy options, breaking new ground in several areas. It introduced the world’s first comprehensive public database of multiple measures of potential GDP growth—covering 173 economies from 1981 through 2021.

The report highlighted specific policy actions at the national level that could make an important difference in promoting long-term growth prospects.

It urged different countries to align monetary, fiscal, and financial frameworks, adding that robust macroeconomic and financial policy frameworks could moderate the ups and downs of business cycles.

It also admonished policymakers to prioritise taming inflation, ensuring financial sector stability, reducing debt, and restoring fiscal prudence.

These policies, the report stated, could help countries attract investment by instilling investor confidence in national institutions and policymaking.

The World Bank report also underscored the need to ramp up investment in areas such as transportation and energy, climate-smart agriculture and manufacturing, as well as land and water systems, adding that sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage point per year as well as strengthen resilience to natural disasters in the future.

The report equally prescribed cut in trade costs, stressing that trade cost, mostly associated with shipping, logistics, and regulations effectively double the cost of internationally traded goods today.

It stated: “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.”

Also prescribed for countries was the need to capitalise on services, noting that the services sector could become the new engine of economic growth, saying that 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, up from 40 per cent in 2019. The shift could generate important productivity gains if it results in better delivery of services. 

Increased labour force participation also featured as a recommendation in the report, which noted that 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 labour force participation as societies age.

The report also underscored the need to strengthen global cooperation, explaining that international economic integration has helped to drive global prosperity for more than two decades since 1990, but has faltered.

“Restoring it is essential to catalyse trade, accelerate climate action, and mobilise the investments needed to achieve the Sustainable Development Goals (SDGs),” it stated.

The new World Bank report was 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.

It paints a disturbing trend that  nearly all the economic forces that powered progress and prosperity over the last three decades are fading.

It stated that as a result, between 2022 and 2030 average global potential gross domestic product (GDP) growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this centur, to 2.2 per cent a year.

For developing economies, it said the decline will be equally steep, from 6 per cent a year between 2000 and 2010 to 4 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, the World Bank said in the report.

The bank’s Chief Economist and Senior Vice President for Development Economics, Indermit Gill, said: “A lost decade could be in the making for the global economy.

“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.”

According to the analysis in the report, potential GDP growth could 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.

“We owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth.

“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 reenergized push to mobilize private capital,” said Ayhan Kose, a lead author of the report and Director of the World Bank’s Prospects Group.

For Franziska Ohnsorge, a lead author of the report and Manager of the World Bank’s Prospects Group: “Recessions tend to lower potential growth. Systemic banking crises do greater immediate harm than recessions, but their impact tends to ease over time.”

Meanwhile, the OEDC has predicted a 2.6 per cent and 2.9 per cent global growth rates in 2023 and 2024 respectively. 

In its interim economic outlook forecasts for March 2023, the organisation observed that a number of developing economies in Africa, Asia and the Americas have experienced sharp economic downturns and acute balance of payments pressures.