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Global economic growth has peaked, says World Bank

Ageing populations, low investment and tightening monetary policy limit expansion

via Shawn Donnan

Global growth appears to have peaked, with demographics, a lack of investment, a slowing in productivity gains and tightening monetary policy placing limits on economic expansion, the World Bank said. The world’s economic output grew 3 per cent last year as more than half of economies accelerated, thanks to a rebound in investment, manufacturing activity and trade, bank economists said. The global economy is expected to maintain that rough growth level through 2020. But that may be as good as it gets, according to the bank’s annual report on the state of the global economy. The problem facing the world is that after years of recovery from the 2008 financial crisis, most advanced and developing economies have closed the output gap between actual and potential economic growth.

Moreover, it is hard to see that changing unless governments embrace the sort of reforms and investment drives that the bank and other institutions have been demanding for years.

“If you step out of the [current] snapshot [of strong growth] and look at . . . the historical progression . . . what you actually observe is that, while the growth is real and welcome, the potential growth of the global economy is going to be somewhat limited in the future,” Shantayanan Devarajan, the bank’s senior director for development economics, said on Tuesday.

As a group, advanced economies are expected to slow in the coming years as they run up against full employment and as central bankers raise rates to contain inflation, according to the World Bank. Already, the bank said, it expected growth in advanced economies to slow from 2.3 per cent last year to 2.2 per cent this year and 1.7 per cent by 2020.

But emerging and developing economies, which grew by 4.3 per cent as a group last year, are also likely to hit ceilings and contribute less to global growth. In many of the major emerging economies that have for years fuelled global expansion the underlying potential growth has fallen considerably over the past decade. It is likely to continue doing so over the next 10 years, the bank said.

That reality, the bank’s economists say, is the result mainly of long-term demographic changes. Countries such as China are seeing their labour forces shrink as populations age. That has coincided with slowing productivity growth. Either could be addressed with investment and innovation and the case for encouraging both was now “absolutely critical”, Mr Devarajan said. The concerns over the long-term future of the global economy also coincide with fears in the short term. Ayhan Kose, one of the authors of the new report, said “downside risks continue to dominate” for the global economy this year.

Among those risks is a sudden rise in the now-low borrowing costs that have helped fuel much of the recovery in recent years, either from quicker than anticipated rate rises from the US Federal Reserve and other central banks, or because of growing concerns about soaring capital markets. Protectionism and a resulting slowdown in global trade also remained a risk, especially as the 4.3 per cent increase in the volume of goods and services traded last year had been so important as an engine for broader growth.

Moreover, Mr Kose said the slowdown in the world’s potential growth had also made it more vulnerable to future shocks. Short of an unexpected surge in productivity gains, the world economy looked as if it faced a “mediocre future”, he said. “This is the time to undertake responsible forward-looking policies.”