In a sobering assessment, the International Monetary Fund (IMF) has projected a significant deceleration in global economic growth to 2.8 per cent by 2030, mirroring predictions made by the World Bank a year ago that global economic growth would fall to its lowest level by the end of 2030. 

This slowdown, compared to the robust 3.8 per cent average witnessed between 2000 and 2019, signals the urgent need for intervention to steer the global economy back on track, the IMF says in its latest World Economic Outlook, April 2024 edition titled ‘Slowdown in Global Medium-Term Growth: What Will It Take to Turn the Tide?’

The report highlights several trends that continue to threaten economic stability. Among these is the sluggish growth in labour inputs aggravated by demographic pressures and declining labour force participation rates as a significant contributor to the impending slowdown.

The IMF says the growth decline is expected to have far-reaching implications, with adverse effects anticipated for living standards, global poverty reduction efforts, and overall economic stability.

“The decline in medium-term growth projections is widespread, reflecting secular forces rather than forecaster pessimism. Expectations for medium-term growth have been revised downward across all income groups and regions, most significantly in emerging market economies. Actual growth has similarly declined,” the report said.

As policymakers deliberate on strategies to reignite global economic growth, the IMF has offered a road map to help countries navigate the challenges of the post-pandemic era and build a more prosperous future, larger by embracing innovative policies and leveraging technological advancements.

The IMF’s recommendations include a series of policy shifts aimed at enhancing labour force participation, improving talent allocation, and leveraging emerging technologies.

It has suggested that countries increase their labour force participation rates by 3.2 percentage points, which could potentially add 0.3 percentage points to global growth. Additionally, in acknowledging the contribution of migrant workers to growth in advanced economies, the IMF proposes higher migration flows coupled with enhanced labour market integration, which it says could result in a 20 basis point increase in global growth.

There are also suggestions on structural reforms aimed at improving allocative efficiency to reduce misallocation and enhance TFP growth by 0.7 percentage points, potentially adding 1.2 percentage points to global growth and enhancing talent allocation, which means closing gender and talent gaps in emerging markets and developing economies.

“Although gaps in occupation and earnings between men and women have been narrowing in advanced economies, they remain significant elsewhere. Closing these gaps could lead to substantial productivity gains, especially if jobs are filled based on innate talent and comparative advantage, not skewed by social norms, barriers, or discrimination. Should talent allocations in emerging markets and developing economies follow the trend in the United States over past decades, global growth could be boosted by a quarter of a percentage point,” the report said.

The IMF is also keen on harnessing AI technologies as well as addressing high public debt.

“The adoption of Artificial Intelligence (AI) technologies is poised to transform the global economy. While the precise impact on growth remains uncertain, IMF estimates suggest a potential increase of 10 to 80 basis points in the medium term,” it said.

Global economic growth sped up from the early 2000s until the big financial crisis in 2008. But since then it has been trending down. The decline is not limited to specific regions, the report said, but is evident across both developing and developed countries. It also sheds light on how the complexities of globalisation influence the flow of money and economic activities on a global scale.

The report tied most of the changes in growth to the contributions of labour, lacklustre business investment, and the efficiency of their use — known as total factor productivity (TFP). In developed countries, the yearly increase in TFP went down from 1.3 per cent in the late 90s to just 0.2 per cent after the pandemic hit. In developing countries and poor countries, TFP growth also went down a lot, from 2.5 per cent and 2 per cent before 2008 to only 0.7 per cent and almost nothing after the pandemic, the report said.

Changes in TFP growth have significantly shifted overall economic growth, accounting for more than half of the decline in advanced and emerging market economies and nearly all of the decline in low-income countries, the report said.

Another reason for slower growth is linked to too little investment in things such as buildings and machines since 2008 in developed countries and 2013 in developing countries. Additionally, as a country undergoes a demographic transition, with declining fertility rates and an ageing population, the share of its working-age population starts to shrink.

Since 2008, growth in the working-age population (ages 15–64) has slowed in about 92 per cent of the global economy and has been negative in about 44 per cent. The slowdown is visible in most advanced and emerging market economies such as Canada, China, the United Kingdom, and the United States, whereas low-income countries still enjoy a “demographic dividend”. These demographic shifts have a direct bearing on global labour supply.

“Demographic pressures weighing on labour supply are expected to intensify in the medium term in most advanced economies and major emerging markets, contributing to lower global growth. By 2030, global labour supply growth is projected to be a mere 0.3 per cent, less than a third of its average in the decade before the pandemic,” the report said.

Capital’s contribution to growth is expected to be 1.7 percentage points, in comparison to the 2000 to 2019 average contribution of 2.1 percentage points. Meanwhile, the TFP growth contribution is expected to decline to 0.9 percentage points by 2030, down from the 2000 to 2019 average of 1.0 percentage points.

“When the contributions of the three factors are summed, the world’s growth rate is projected at 2.8 per cent in 2030 under the baseline scenario. This suggests that global growth could fall even more, below the current WEO medium-term forecast.

“This would represent a significant slowdown relative to the historical (2000–19) annual average of 3.8 per cent,” the report said.