Time is running out for policy makers in the world’s largest economies to return to a healthier growth path.
That is the latest warning from the International Monetary Fund, which said in a new report Tuesday that aging populations and sluggish advances in worker productivity are quickly binding the global economy to a bleaker, low-growth fate.
Potential growth – the ability of economies to expand based on the available labor supply, know-how and capital – fell in the wake of the 2008 financial crisis. While central banks offered years of cheap money, many governments failed to use the easier financial conditions to restructure their economies. As a result, the IMF said it sees stagnating growth potential in the next five years.
“Increasing potential output will need to be a policy priority in major advanced and emerging market economies,” the IMF said in an analytical chapter of the fund’s latest World Economic Outlook. The report, due to be published in full on April 14, sets a gloomy tone for the annual meetings of the world’s finance ministers and central bankers in Washington later in the week.
Potential output in advanced economies largely led by the U.S. should increase marginally to an average of 1.6% through the remainder of the decade as some of the effects of the crisis wear off, the fund said. That is up 0.3 percentage point from the six years after the crisis but well below the 2.2% recorded before the financial meltdown.
The IMF calculates the growth capacity of major emerging-market economies will shrink by nearly two percentage points from pre-crisis levels to an average of 5.2% through 2020, with a hefty portion of that write-down coming from China.
Shrinking labor pools are a major culprit, the fund said. In Germany and Japan, for example, the working-age population is expected to shrivel by around 0.2% a year over the next five years. That problem is compounded by a labor pool that is aging faster than the number of youth entering the workforce.
It is a similar problem in the world’s largest emerging-market economies. Over the past 25 years, Brazil’s fertility rate has fallen from an average of nearly three children per woman to fewer than two. China’s government has long enforced a one-child policy for much of the population. In Russia, the working-age population is contracting.
Another factor in the bleaker outlook is a deceleration in productivity levels around the world, especially the gains that come from the use of technology. The productivity boost that technology gave to advanced economies has been fading since before the crisis, the IMF found. But emerging markets are also approaching the technology frontier, which may curb how much new growth can come from such productivity gains.
Lower growth potential comes with a host of bad consequences.
For advanced economies, especially in the eurozone and Japan, it will be much harder for governments, households and companies to pay down the mountains of debt they” have accumulated in the past decade. It also will constrain the ability of central bankers to juice economic growth. And it will stifle investment as businesses worry about future demand. That is why investment levels across a broad swath of private sectors still haven’t recovered to precrisis levels.
For emerging markets, it will take longer for governments to build up emergency buffers spent during the crisis to insulate against economic fallout. That is a problem for many countries facing weak demand for their exports from abroad and higher debt burdens, especially as borrowing costs are set to rise.
For all economies, lower potential growth means living standards won’t improve at nearly the clip seen before the financial crisis.
Signs of weakening potential growth can be found around the globe. Large parts of the eurozone economy are either contracting or close to stagnating, with Germany’s export-led economy barely keeping the currency union from falling into the third recession since 2009.
Japan is struggling to pull out of recession itself despite a central bank balance sheet approaching 75% of the country’s gross domestic product. Tokyo has pushed through budget overhauls designed to put government finances back on track, but Prime Minister Shinzo Abe hasn’t been able to introduce greater competition into long-protected sectors of the economy.
Brazil’s economy is expected to shrink for a second year as investors worry about whether the government can improve the country’s competitiveness.
China’s central bank is fueling cheap borrowing, despite building risks in the financial sector, to prevent a precipitous fall in economic growth. While the roughly 7% growth rate of the world’s No. 2 economy remains the envy of rich countries, it is the lowest level in a quarter century and is falling faster than many economists expected.
It is questionable, however, whether the IMF’s warnings will spur authorities to make the changes needed to raise growth prospects around the world. Two previous attempts by the Group of 20 largest economies to boost global growth in recent years have largely sputtered as promises for economic overhauls withered in the face of domestic political realities.
