Illustration: Annelise Capossela/Axios
The global economy is facing an era of worsening demographics, ongoing inflation pressure and financial instability, according to a gloomy new report from The World Bank.
Why it matters: If the economy is like a car, its potential growth rate is how quickly it can go without risking a ticket — or excess inflation. The World Bank says this “speed limit” has fallen dramatically, warning that forces juicing global economic growth are now in retreat.
- A nation’s potential growth rate sets boundaries that can affect a slew of policies, including government spending and benchmark interest rates.
What they’re saying: “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,” bank officials wrote in the report.
By the numbers: The World Bank estimates that the globe’s potential growth rate will average 2.2% throughout the rest of this decade. That would make it the lowest rate in 30 years.
- For context, that rate was 3.5% in the early 2000s, and 2.6% between 2011 and 2021.
The reasons for that slowdown in potential output stem from a slew of factors, many of which are problems that were made worse by the effects of the pandemic and Russia’s invasion of Ukraine.
- That includes sluggish productivity and labor force growth and tempered international trade. The organization points to a lasting shock to human capital from COVID-19, learning losses and school closures that will weigh on potential growth.
The big picture: The drop-off will have wide-ranging consequences, limiting every nation’s ability to invest in measures that would reduce poverty, combat climate change or boost job creation to find new venues to up productivity.
- “All of these things will be curtailed because of weaker potential growth going forward,” Ayhan Kose, the group’s chief economist, told reporters this morning.
The bottom line: The World Bank says a slew of policies — including ones that slash trade-related costs, embrace globalization and increase labor force participation rates — could raise the globe’s potential growth rate.
- Still, plenty of risks loom, including the potential for a worsening bank crisis.
- “The slowdown we’re describing could be much sharper if another global financial crisis erupts, especially if that crisis is accompanied by a global recession,” Kose says.