The World Bank has joined a growing chorus predicting an end to the global economy’s strong run. Stock prices are high relative to earnings and volatility is at historic lows, warnings that economists traditionally take as signs of overheating.

“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,” said Franziska Ohnsorge, a World Bank economist.

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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.

Economist Willem Buiter at Citi also fears the business cycle is nearing its end and a 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.

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, 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,” Ohnsorge said, warning that this 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 [with] 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. “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.

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, a World Bank economist.

“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.”

There are steps that policymakers can take to try to improve 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.

Policies 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.

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 co-operation, 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.

Telegraph, London

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