Global economy is skidding towards a 'lost decade,' World Bank warns
After three decades of mostly fast-paced growth, the global economy may finally be in for a big slowdown. A number of economic risks, including an aging global workforce and declining private sector investment, are converging to limit economic growth. Left unattended, these threats could reverse decades of efforts to reduce poverty and fast-track development, while setting the stage for a “lost decade.”
That’s the warning of a new report released by the World Bank on Monday that finds almost every factor that fueled global economic growth and poverty reduction since the 1990s could disappear by the end of this decade. Global GDP growth could shrink to 2.2% annually between now and 2030, a decline of a third from the 3.5% average rate from 2000 to 2010 and a source of potential economic stagnation for years to come.
“A lost decade could be in the making for the global economy,” Indermit Gill, the World Bank’s chief economist, said in a statement, referring to extended periods of snail-paced growth that have afflicted countries including the U.S. and Japan. But the next lost decade could be much larger in scope, affecting the global economy and inhibiting countries’ ability to invest in addressing future threats.
“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,” Gill said.
The report referred to potential GDP growth as an economy’s “speed limit”: how much growth policymakers can realistically target without risking excess inflation. An economy’s speed limit is a moving target that can be raised when productivity and economic activity increase. But currently, almost every important economic trend is pointed in the opposite direction, with major implications for wealthy and developing nations alike.
“Today nearly all the economic forces that drove economic progress are in retreat,” World Bank President David Malpass wrote in the report’s foreword. “The result could be a lost decade in the making—not just for some countries or regions as has occurred in the past—but for the whole world.”
A new economic reality
Chiefly responsible for lowering the global economy’s speed limit is slowing productivity gains in labor forces worldwide, a long-standing trend that was aggravated by the COVID-19 pandemic and the war in Ukraine. Productivity this decade is likely to grow at its slowest rate since 2000, according to the World Bank.
Productivity—a measure of how much employees produce for every hour worked—is declining worldwide, but not because people are working less. In the U.S., labor productivity fell 4.1% last year, the biggest drop since the government began measuring productivity in 1948. Economists and CEOs have been scratching their heads over why U.S. productivity is slowing amid a historically tight labor market and with a workforce that is putting in more hours than any other industrialized nation. The consensus is that productivity is suffering from a range of factors including high rates of burnout, job dissatisfaction, and a lack of understanding and trust between employer and employee in the age of remote work.
But the World Bank identified a much larger worldwide trend that could deal a fatal blow to the global economy’s speed limit: a looming decline of skilled young workers that is dragging down the global labor force. Because of declining birth rates worldwide, it’s a challenge that will likely get worse before it gets better.
An aging labor force globally is shaping up to be one of the key demographic issues of the 21st century, with a lack of young workers already weighing down economic growth prospects in rapidly aging countries like Japan and South Korea. Rising rates of workers entering retirement age without enough young people to replace them is also becoming a mounting challenge in the U.S., China, and several European countries. Aging populations have fanned fears over strained government budgets, while efforts to raise retirement age have been met with public resistance and protests in countries like France.
Malpass warned in the report that the global labor force is “growing sluggishly” because of aging populations in wealthy and developing nations, while the global learning losses for children caused by the pandemic are expected to create more drag on human capital. Meanwhile, the Ukraine war has strained international relations, damaging the global movement of goods and people in another hit to the world economy’s speed limit, according to the report.
The World Bank isn’t the first to warn about converging factors that are difficult to address and threaten to radically alter the global economy. The World Economic Forum made the polycrisis—the idea that multiple economic, political, and ecological threats are set to rock the globe simultaneously—a central theme of its latest summit of world leaders in Davos earlier this year. Economists including Adam Tooze and Nouriel “Dr. Doom” Roubini also speak often about the impact of a polycrisis on the economy this decade.
Although the world’s economic speed limit is falling, coordinated efforts to fix the problem could also raise it again, the World Bank said in its report. Policies that facilitate international trade and investment, strengthen globalization, and ensure financial stability can help increase the world’s economic capacity. Key to any efforts to raise productivity is increasing labor supply through education and immigration, and fast-tracking automation to take over routine occupations, according to the report.
“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.