Global Decrease in Economic Growth: Can This Be Solved?

By Laura Torres

Edited by Dalya Birsel

In recent times, there has been a significant reduction in economic growth in low income and developing countries. Throughout time, global inflation has been a keen issue all over the world, and whilst there have been global efforts made to combat this issue, it remains prominent in most developing countries. In the second half of 2022, global inflation peaked at 9.4% and economists predicted that inflation would fall by 3.5% in the following year. Inflation would then be aligned with international central bank targets and “pave the way for monetary easing across major central banks.” (International Monetary Fund). Stable economic growth is crucial in maintaining a strong economy, as it prevents rapid inflation, overheating of the economy, and recession. Accordingly, the global economy has maintained stability with growth, with economic growth holding steady at 3.2% this year and provisionally in 2025. Although this is the overall global statistic, economically underdeveloped countries still struggle with rapid inflation and economic recession.  A solution for this decrease in economic growth has been proposed; the “Policy Triple Pivot”. This would help stabilize and strengthen global economies considering the aforementioned risks. 

The first pivot monetary policy consists of central banks reducing interest rates in advancing economies by reducing the rates at which commercial banks borrow or deposit money to the European Central Bank. Thus, reducing financial pressure on emerging markets. This would allow their currencies to strengthen in comparison to the US dollar, a common measure of currency strength. Additionally, this policy functions to reduce imported inflation, and gives economically emerging countries an opportunity to pursue their own disinflation path. However, inflation in service industries remains high (almost double pre-pandemic levels). According to the International Monetary Fund, the world is now “dominated by supply disruptions; from climate, health, and geopolitical tensions.” When faced with such unpredictable circumstances, it is harder for monetary policies to contain inflation, which simultaneously increases prices and reduces output (International Monetary Fund) (Blominvest Bank). 

The second pivot is the fiscal policy which includes stabilizing debt dynamics and rebuilding fiscal buffers. This will be a tricky process. Whilst the decline in policy rates provides some fiscal relief by lowering funding costs, it is not sufficient, as long-term real interest rates remain well above pre-pandemic levels. Therefore, in various countries, the primary balance (which is the difference between fiscal revenues and public spending net of debt service) must improve. If this is successful, it will aid these countries by lowering borrowing costs, preventing market instability and boosting economic growth (International Monetary Fund) (Blominvest Bank). 

Finally, the third pivot is centred around growth enhancing reforms to tackle contemporary global challenges. This includes “rebuilding fiscal buffers, coping with aging and shrinking populations, tackling the climate transition, increasing resilience, and improving the lives of the most vulnerable, within and across countries.” (International Monetary Fund) (Blominvest Bank) (European Environment Agency). While all of this seems daunting, it is achievable through effective international cooperation. 

Works Cited

Gourinchas, Pierre. “As Inflation Recedes, Global Economy Needs Policy Triple Pivot.” International Monetary Fund (IMF), 22 October 2024, https://www.imf.org/en/Blogs/Articles/2024/10/22/as-inflation-recedes-global-economy-needs-policy-triple-pivot. Accessed 2 December 2024.

“Growth without economic growth — European Environment Agency.” European Environment Agency, https://www.eea.europa.eu/publications/growth-without-economic-growth. Accessed 2 December 2024.

“World Economic Outlook: As Inflation Recedes: Global Economy Needs Policy Triple Pivot.” Blominvest Bank.