Thursday, June 8, 2023

Global economy’s ‘speed limit’ set to drop to three-decade low: World Bank

It said these declines would be much steeper in the event of a global financial crisis or a recession.

• March 27, 2023
World Bank

A new World Bank report says the global economy’s “speed limit” is set to drop to a three-decade low by 2030.

The “speed limit” is the maximum long-term rate at which the economy can grow without sparking inflation.

The report titled ”Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” offered the first comprehensive assessment of long-term potential output growth rates after the COVID-19 pandemic and the Russian invasion of Ukraine.

“These rates can be thought of as the global economy’s “speed limit,” it said.

The report introduced the world’s first comprehensive public database of multiple measures of potential Gross Domestic Product (GDP) growth covering 173 economies from 1981 through 2021.

“The report documents a worrisome trend: nearly all the economic forces that powered progress and prosperity over the last three decades are fading.

“As a result, between 2022 and 2030, average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century to 2.2 per cent a year.

“For developing economies, the decline will be equally steep, from six per cent a year between 2,000 and 2010 to four per cent a year over the remainder of this decade.”

It said these declines would be much steeper in the event of a global financial crisis or a recession.

It quoted Indermit Gill, World Bank’s Chief Economist and Senior Vice-President for Development Economics, saying, “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.”

Mr Gill said the challenges include 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 statement said analysis showed that as much as 0.7 percentage points could boost potential GDP growth to an annual average rate of 2.9 per cent if countries adopted sustainable growth-oriented policies.

The statement quoted Ayhan Kose, the report’s lead author, saying, “we owe it to future generations to formulate policies that can deliver robust, sustainable, and inclusive growth.”

Mr Kose, also the Director of World Bank’s Prospects Group, said that 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.”

Franziska Ohnsorge, a lead author of the report and manager of the World Bank’s Prospects Group, said recessions tend to lower potential growth.

“Systemic banking crises do greater immediate harm than recessions, but their impact tends to ease over time.”

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

“Policymakers should prioritise taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.

“These policies can help countries attract investment by instilling investor confidence in national institutions and policymaking.”

The statement said another policy action was to ramp up investment in transportation and energy, climate-smart agriculture and manufacturing, and land and water systems.

It said another policy action was to cut trade costs, especially costs associated with shipping, logistics, and regulations.

The statements said other policy actions were to increase labour force participation and capitalise on services because the services sector could become the new engine of economic growth.


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