The World Bank cautioned that the coronavirus pandemic and Russia’s war in Ukraine have contributed to a decline in the global economy’s long-term growth potential, possibly leading to a “lost decade” characterized by increased poverty and fewer resources to address climate change.
This warning arises as the world grapples with multiple crises, including the pandemic’s impact on economies and public health systems and Russia’s invasion of Ukraine, which has disrupted global supply chains and damaged international trade relations. This threat of a prolonged slump coincides with new indications of stress in the global financial system, as a series of banking crises risk undermining economic growth.
The World Bank’s new report forecasts average potential global output to drop to a 30-year low of 2.2% per year between 2023 and 2030, a significant decline from 3.5% per year in the first decade of the 21st century. Developing economies are expected to experience an even more pronounced decline, with growth rates potentially dropping from 6% to 4% during this decade.
Indermit Gill, the World Bank’s chief economist, emphasized the serious implications of the ongoing decline in potential growth for the world’s ability to address challenges such as poverty, income disparities, and climate change.
World Bank officials warn that the “golden era” of development seems to be drawing to a close, and policymakers will need to be more innovative in addressing global issues without relying on rapid economic expansions from countries like China. They propose that international monetary and fiscal policy frameworks should be more closely aligned and that world leaders must find ways to reduce trade costs and increase labor force participation. However, a return to faster growth will not be easy.
Recent banking sector turmoil, including the failures of Silicon Valley Bank and Signature Bank in the United States and the rescue of Credit Suisse by UBS, has raised concerns among top economic officials about the potential for a recession. International Monetary Fund (IMF) Managing Director Kristalina Georgieva noted that “risks to financial stability have increased” and urged policymakers to remain vigilant.
World Bank officials added that if the current banking turmoil spirals into a financial crisis and recession, global growth projections might be even weaker due to the associated job and investment losses.