Ref. :  000038232
Date :  2015-04-07
Language :  English
Home Page / The whole website
fr / es / de / po / en

Lower Potential Growth: A New Reality

WEO ANALYTICAL CHAPTER

Author :  FMI / IMF

Since the onset of the global financial crisis, many economies have faced lower growth in their productive capacity, which may slow the rise of living standards in the future, according to a new study by the IMF.


Global output growth fell sharply during the global financial crisis, and a new study published in the IMF’s April 2015 World Economic Outlook report suggests that a considerable portion of this slowdown is due to economies facing lower “speed limits”. An economy’s speed limit—referred to as potential output growth—dictates how rapidly it can expand its production of goods and services without increasing inflation.

The evidence presented in the study suggests that absent policy action to encourage innovation, promote investment in productive capital, and counteract the negative impetus from aging, countries will have to adjust to a new reality of lower speed limits.

Potential output: taking stock

Potential output measures a country’s productive capacity with stable inflation. It depends on the supply of two factors of production—labor and capital inputs—and how productively they are used. For potential output to grow, either the supply of these factors or productivity has to grow.

In the years since the global financial crisis many economies have witnessed slower expansions in one or more of these key components of potential output growth (see chart 1). Lower potential growth in advanced economies has been driven in roughly equal measure by slower capital accumulation and labor growth—due primarily to adverse demographics. In emerging market economies much of the decline is attributable to slower productivity growth.


image


Going forward: what can we expect?

As economic conditions improve and activity recovers, investment growth should pick up, fostering a gradual recovery in productive capital growth in many advanced economies. However, prospects for the labor force are grimmer. As chart 2 shows, demographic factors are likely to act as a brake on growth in many advanced and emerging market economies, as populations age and workers retire.


image


Productivity growth is not expected to pick up under current policies. In emerging market economies, past technological improvements and enhanced educational attainment have allowed these economies to narrow the gap between themselves and advanced economies. Although more strong growth can still be achieved from further improvements in these areas, the returns to education and innovation are unlikely to be as large as they were initially, when these economies were further from the technological frontier. This suggests weaker productivity growth in these economies in the future.

For their part, advanced economies should see productivity growth near recent rates in coming years. Still, the rapid pace of expansion seen in the late 1990s and early 2000s—fueled by the exceptional information-communication-technology boom—is unlikely to be restored.

In sum, these scenarios suggest that potential growth in advanced economies is likely to remain below precrisis rates, while it is expected to decrease further in emerging market economies in the medium term (see chart 3).

These findings imply that living standards may expand more slowly in the future. In addition, fiscal sustainability will be more difficult to maintain as the tax base will grow more slowly.


image


Policy actions to raise the speed limit

There is still room for optimism—the future trajectory of potential output is not set in stone. However, there is a need for action. To raise economic speed limits, policies need to encourage innovation, promote investment in productive capital, and counteract the negative impetus from aging. Although the right mix of policies will differ by country, some broad prescriptions can be made:

• Innovation can be encouraged and productivity can be enhanced with greater support for research and development—this can be achieved by strengthening patent systems and adopting well-designed tax incentives and subsidies in economies where these are low.

• Worker productivity can be increased by improving education quality and boosting secondary- and tertiary-level attainment.

• Bottlenecks that are holding back production in some emerging market economies can be eliminated through higher infrastructure spending.

• There is scope for better business conditions and improved functioning of product markets in some countries.

• Labor-force participation must be promoted, particularly among female workers in some countries, and aging workers in others—this would entail better designed tax and expenditure policies in some economies.

• Demand support through monetary and, where feasible, fiscal policy remains important in several economies to boost investment and capital growth.


By Patrick Blagrave and Davide Furceri
IMF Research Department


Related Links

Read report
Why weak private investment
Public infrastructure


Rate this content
 
 
 
Average of 25 ratings 
Rating 2.36 / 4 MoyenMoyenMoyenMoyen
Same author:
 flecheIMF Sees Subdued Global Growth, Warns Economic Stagnation Could Fuel Protectionist Calls
 flecheWorld Economic Outlook October 2016
 flecheGlobal Financial Stability: Vulnerabilities, Legacies, and Policy Challenges
 flecheMiddle East Outlook Sees Modest Improvement, But Risks Remain
 flecheFinancial Services Access Vital to Central Africa Growth
 flecheIMF Agenda Focuses on Achieving More Dynamic, Job-Rich Global Economy
 flecheJobs, Growth, Fairness Top List of Priorities for Arab Countries
 flecheWorld Economic Outlook Reports
 flecheGlobal Economy Turning Corner of Great Recession, But Obstacles Ahead
 flecheThe Trillion Dollar Question: Who Owns Emerging Market Government Debt
 flecheDespite new risks, global recovery seen gaining strength
 flecheG-20 ministers agree ‘historic’ reforms in IMF governance
 flecheIMF enhances crisis prevention toolkit
 flecheAfrica’s economic transformation—the road ahead
 flecheLe secteur privé gagne du terrain en Afrique
 flecheThe IMF response to the global crisis: meeting the needs of low-income countries
 flecheWorld Economic Outlook (April 2009) - press point for chapter 3 "From recession to recovery: how soon and how strong?"
 flecheIMF calls for urgent action as third wave of global crisis hits poorest countries
 flecheGlobal Financial Stability - Report Market Update
 flecheWorld Economic Outlook - October 2008 (Full report)
 flecheThe Rise of Africa's "Frontier" Markets
 flecheLe FMI précise comment il surveillera les politiques économiques
 flecheGlobal financial stability report
 flecheIMF Shifts Focus to Key Global Economic and Financial Concerns
 flecheIMF Board of Governors adopts Quota and Voice reforms by large margin
 flecheInternational Working Group of Sovereign Wealth Funds is established to facilitate work on voluntary principles
 flecheGlobal Financial Stability Report (Executive summary)
 flecheGlobal governance: new players, new rules
 flecheIMF Managing Director highlights progress on IMF reform agenda and warns IMF Board of Governors of slower global growth
 flecheStrauss-Kahn to press ahead on IMF reform
 flecheThe rise of sovereign wealth funds
 flecheUrban poverty
 flecheThe urban revolution
 flecheGlobal Growth Seen at 5.2 pct in 2007
 flecheWorld Economic Outlook - 2007
 flecheRenewing the IMF's Commitment to Low-Income Countries
 flecheGlobalization and Inflation - World Economic Outlook
 flecheIMF to Extend 100 Percent Debt Relief for 19 Countries Under the Multilateral Debt Relief Initiative
 flecheNew Report Calls For Urgent Action To Cut Global Poverty and Win Better Development Results For Poor Countries
 flecheRato y Figaredo, Rodrigo de
 flecheExpanding trade and unleashing growth: The prospects for lasting poverty reduction
 flecheCan the East Asian Miracle Persist?
 flecheEmerging Asia: Outlook, Challenges, and India's Growing Role
 flecheWorld Economic Outlook
 flecheCommuniqué of the Ministers and Governors of the Group of Ten
 fleche"Why Globalization Works" Economic forums and international seminars
 flecheWorking paper : External Debt Sustainability in HIPC Completion Point Countries
 flecheChina's rapid economic growth and integration into the global economy
 flecheInternational Monetary Fund
 flecheIMF Members' Quotas and Voting Power, and IMF Board of Governors
 flecheIMF Executive Board Discusses Euro Area Policies
 flecheToward a Stronger Europe in the Global Economy
 flecheThe IMF Stands Ready to Help Iraq
13
SEARCH
Keywords   go
in 
the articles