The global economy will fizzle into a decade of sluggish growth in the 2020s as the current upswing fades and a slowdown in population kicks in, the World Bank has warned.
Its analysts expect the world economy to grow 3.1 percent this year, following a strong 2016 as the shadow of the financial crisis is at last shaken off.
But it will be the high point of a temporary cyclical recovery, as underlying structural problems make themselves known in the next decade.
Weak productivity growth across the world, poor levels of investment and the ageing of the global workforce will all dent GDP growth.
“This is a cyclical recovery, it is just a rebound from very weak growth in 2016. Underneath that there is a slowdown in potential growth,” said Franziska Ohnsorge, an economist at the World Bank, according to the Telegraph.
“If you look backward 10 years, potential growth has slowed by about 1 percentage point globally. Looking forward we expect it to slow further.
“Potential growth for the next decade is estimated at about 2.3pc.”
This forecast is based on a relatively benign scenario in which none of the big risks to growth emerge.
The World Bank believes the biggest risk comes in financial markets, where share price valuations are at levels not seen before except in 2000 and in 1929 – the dotcom bubble and the Wall Street Crash.
If inflation rises only slowly then markets may stay safe.
But if prices pick up more rapidly than expected and central banks have to raise interest rates suddenly, it could cause a crash.
“If there is a surprise in monetary policy decisions there could be jitters in global financial markets. And markets are currently vulnerable to the unforeseen negative news. This is the main risk we see to the global economy,” said Ohnsorge.
Stock prices are high relative to earnings and volatility at historic lows, which may be warning signs.
“There is a sense in which financial markets appear to be complacent. That makes room for disruption when there are surprises – a repricing of risk.”
Her warning echoes those of institutions including Legal and General Asset Management which fears the US economy and markets will surge ahead this year before rate hikes burst the bubble and cause a recession – which could spread worldwide.
Economist Willem Buiter at Citi also fears the business cycle is nearing its end and that a market correction is overdue.
There are other downside risks to the outlook, too.
The World Bank fears an upsurge in protectionism could stop trade growth from recovering, undermining GDP.
Geopolitical tensions pose a threat as well, as the institution cites trouble in the Korean peninsula, turmoil in the Middle East and any re-emergence of governance problems in the eurozone among the potential risks which could throw regional economies off track.
It is difficult to overestimate the importance of the predicted slowdown, even if those risks do not come to pass.
Population growth has driven a substantial portion of GDP growth in recent decades, but this is now slowing.
As a result of economic growth, and rising living standards, will have to be driven by productivity growth in future if prosperity is to continue to emerge and poverty to be reduced.
“It would be the slowest decade of potential growth since [the World Bank’s dataset began in] the mid-Nineties,” she said, warning that it could have serious repercussions for investors and for borrowers.
“Currently nobody takes that into account because of the cyclical recovery. But cyclical recoveries get their own momentum and growth seems very strong. It is when growth fizzles out that there is a reassessment of growth prospects, which usually comes a reassessment of debt sustainability, of any debts – sovereign, public, private.
“That is the risk, that markets suddenly reassess long-term growth prospects, and so debt sustainability of any borrower is weaker.”
Jeremy Lawson, chief economist at Aberdeen Standard, agrees that too little attention has been paid so far to the cyclical nature of the upswing, leaving the world exposed when growth slows once more.
“One of the dangers in the current economic environment is to mistake a cyclical upswing for a sign that potential growth is much higher,” he said.
“The bulk of evidence on why productivity growth is so weak points to structural drivers, and they won’t go away unless governments come in with policies to address that.
“This is a healthy cycle with some really concerning long-term features – globalisation is slowing down, underlying productivity growth is weak for a host of reasons which began before the financial crisis, demographics are not going to improve anytime soon. What that means is, when the next downturn does come, how do you control monetary policy at the zero lower bound, what is the role for fiscal policy, do we need to rethink this entire policy consensus?”
There are steps that policymakers can take to try to help underlying growth, the World Bank said.
Improving education and skills could help, as would investing in infrastructure.
If countries managed to replicate their biggest policy-induced growth boosts from recent decades, it could completely avoid the slowdown.
However, this is difficult to achieve as some of the most effective structural policies will vary enormously from country to country, so it is difficult for the World Bank to give a clear policy prescription for general use.
These could include extra training and finance for women to encourage them to set up businesses, which has boosted the supply of female workers in Nigeria.
There are things that have been done which have lifted potential growth and could do it again. The question is, can so many countries in the world do them together at the same time?Franziska Ohnsorge, World Bank.
Shifting healthcare systems to improve treatment of the elderly has extended productive working lives in Eastern Europe and Central Asia, the World Bank said, while extending the school day in Uruguay helped more parents stay in work.
Better governance around the world “could raise potential growth by as much as half a percentage point”, said Ohnsorge.
“There are things that have been done which have lifted potential growth and could do it again. The question is, can so many countries in the world do them together at the same time?”
The G20 is one possible forum for such cooperation, but there is less political will for action than there was in the financial crisis, and the governments’ likely solutions will be more complicated than the combined fiscal stimulus agreed in the crisis years.