The global economy is facing a "lost decade." What does this mean and why is everything so bad?

Recently, the World Bank published a book "Deteriorating prospects for long-term growth." Nearly 600 pages present the findings of a research team of 15 economists who have spent years studying why the world is slowing down. Their main conclusion is that the world may face a "lost decade". Economic growth has been slowing for the past 20 years, and this process is projected to accelerate in the 2020s.

Experts Doberman.media answers the main question that arises with such pessimistic forecasts – why is the global economy slowing down so much and what does it mean for people around the world?

What is happening in the global economy?

To understand the current situation, the authors of the book suggest comparing the present with past times. For example, after the Spanish flu pandemic in the 1920s, the world entered an era of technological progress known as the "Roaring Twenties." At that time, mass modernization took place in the United States and Europe, industry was actively developing, car production was growing, houses and factories were electrified. At that time, the economy grew by an average of 3.6% per year, which is significantly higher than the pace of the previous two decades.

Today, when humanity is trying to recover from the COVID-19 pandemic, we would also like to expect an economic boom. Moreover, we have a lot of new technologies: artificial intelligence, blockchain, 3D printing, and alternative energy sources. But World Bank experts warn that despite these innovations, the next decade may not be "roaring" but "disappointing."

Why is the global economy slowing down?

Economists define "potential growth" as both the maximum speed of a machine and the maximum possible GDP growth rate. This figure depends on the number of employees, their skill level, the technology available and the amount of investment. Over the past two decades, this "potential" has been steadily declining: in the 2000s, the growth rate was 3.5%, in the 2010s it was 2.6%, and by 2030 it may fall to 2.4%.

Особенно сильно тормозится рост в развивающихся странах: их потенциал снизился с 6% в 2000-х до 4% в наши дни. Ожидается, что экономическое торможение затронет 80% мирового ВВП.

How will this affect people's lives?

Замедление экономического роста угрожает множеством проблем. Экономисты напоминают, что с такими темпами не удастся достичь цели ООН по сокращению глобальной бедности до 3% к 2030 году. Сейчас бедность оценивается в 9% мирового населения, и этот процент вряд ли будет уменьшаться.

Lower growth means fewer resources to tackle problems such as poverty and climate change. The number of jobs will decrease, wage growth will slow down, which will inevitably lead to social discontent. Moreover, countries with high public debt will find it more difficult to service it, which threatens financial crises.

What slows down growth?

Economists analyze three main factors – labor, capital and productivity:

1. Labor. The working-age population is growing more slowly, and in developed countries it is even decreasing. Aging populations, low fertility rates, and the exodus of migrants from developing countries only exacerbate the problem.
2. Equity. In advanced economies, investment is still possible, but in emerging economies such as China, investment is slowing. This is due to the consequences of the pandemic, the war in Ukraine and tightening credit conditions to fight inflation.
3. Performance. Its growth has slowed, especially in countries where investment is declining. Productivity is highly dependent on trade, but international trade grows more slowly. The pandemic and protectionist sentiments are weakening globalization.

Is there a way out?

Economists are confident that the situation can be corrected if we actively invest in human capital and modernize infrastructure. Improving education, health care, and creating conditions for women to enter the labor market could significantly accelerate growth.

But even if reforms are started immediately, their effect will not be noticeable until the end of the decade. In addition, there are many risks – possible global recessions, wars and climate disasters could exacerbate the situation.

As a result, although the world is facing serious economic challenges, there is a way out. But it will take time, effort, and significant investment.