Global economy’s “speed limit” to fall to three-decade low - WB

Systemic Banking crises, recessions have lasting effects on growth, development

In Summary

•Kenya's economy is projected to grow by an average five per cent (5%) this year, as global and domestic shocks continue to impact on economies.

•It is expected to pick to 5.3 per cent next year even as the country lags behind its East African peers of Tanzania and Uganda, which have stronger forecasts.

Residents of Kibera, Nairobi during the ongoing protests on the high cost of living in Kenya, on March 27/
Residents of Kibera, Nairobi during the ongoing protests on the high cost of living in Kenya, on March 27/

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, World Bank now says. 

An ambitious policy push is needed to boost productivity and the labor supply, ramp up investment and trade, and harness the potential of the services sector, a new report shows.

The report, Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, 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.

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

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 2000 and 2010, to four 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.

“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. 

According to Gill, the ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to current 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 incentivize work, increase productivity, and accelerate investment,” Gill said on Monday.

World Bank had earlier revised downwards Kenya's growth prospects for 2023, projecting an average five per cent (5%) growth, on the back of the global and domestic shocks.

It is however expected to pick up to 5.3 per cent next year even as the country lags behind its East African peers of Tanzania and Uganda, which have stronger forecasts.

Tanzania’s economy is expected to grow by 5.3 per cent this year and 6.1 per cent next year, while Uganda has a similar projection with Kenya of five per cent this year, but a stronger forecast of 6.1 per cent in 2024.

The projections, captured in the World Bank January 2023-Global Economic Prospects Report, is a downward revision from an earlier stronger forecast of 5.2 per cent for Kenya this year.

This comes amid an expected sharp drop in global growth to 1.7 per cent in 2023—the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic in 2020 and the global financial crisis in 2009.

World Bank however notes potential GDP growth can be boosted by as much as 0.7 percentage points—to an annual average rate of 2.9%—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,” said Ayhan Kose, a 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 cooperation and a reenergized push to mobilise private capital,” Kose added.

The report lays out an extensive menu of achievable policy options, breaking new ground in several areas.

It introduces the world’s first comprehensive public database of multiple measures of potential GDP growth—covering 173 economies from 1981 through 2021.

It is also 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.

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

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

They include aligning monetary, fiscal, and financial frameworks where it says robust macroeconomic and financial policy frameworks can moderate the ups and downs of business cycles.

With this, policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.

Others are ramping up investment, cutting trade costs, capitalising on services, and increasing labor force participation.

"About 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 labor force participation as societies age," World Bank notes. 

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