What’s Hampering Global Growth?
Four Reasons for the Economic Slowdown
New IMF figures show that global economic growth has slowed to its lowest rate since the depths of the crisis in 2009. In a new research paper, Stephen Pickford outlines four reasons for the current malaise.
(1) Secular stagnation.
One argument is that the world has entered a period of ‘secular stagnation’. This means that a lack of attractive investment opportunities has encouraged people and firms to save rather than invest. The resultant high levels of saving and low expected returns on investment have driven down real interest rates worldwide. Consequently, despite record low borrowing costs and unorthodox policies such as quantitative easing and negative interest rates, economic growth is likely to remain slow so long as global demand for investment remains stagnant.
(2) Slow post-crisis deleveraging.
The build-up of debt and the slow pace of post-crisis deleveraging have also been suggested as potential drags on growth. Global debt has rose to $199 trillion in 2014, up from $142 trillion in 2007, and the IMF projects that debt-to-GDP ratios will not return to pre-crisis levels until after 2020. This high degree of leverage across the main regions of the world makes additional investment unattractive, and is acting as a drag on global economic growth.
(3) Growth transitions.
Structural emerging market growth ‘transitions’, particularly in China, have been cited as another possible cause for slow growth. After the 2008 financial crash, emerging markets became the main engine of global growth for some years. Much of this demand was generated by rapid industrial growth and investment in China. However, China’s growth rate has now declined from a high of 10.6% in 2010 to 6.9% in 2015, a 25-year low. The Chinese government expects a further slowing of GDP growth as the country makes the transition to an economy that is less dependent on manufacturing, exports and fixed-asset investment, and more focused on services and domestic consumer demand. This combination of slower growth and the consequent reduction in demand for commodities will have numerous spillover effects — including on investors seeking higher returns in China; on supply chains dependent on Chinese industrial growth; and on commodity exporters exposed to Chinese demand. These spillovers mean that a slowdown in China will have economic and financial ramifications far beyond China’s borders.
(4) A new normal.
Finally, it is possible that the financial crisis and the response to it have established a ‘new normal’ environment in which the potential capacity of the world economy, and its prospects for sustained growth, are permanently reduced. This could happen through several channels. A reduction of skills stemming from long-term unemployment could permanently reduce the potential of the economy — in the eurozone alone, for example, the percentage of the labour force that has been unemployed for over two years increased by almost 2% between 2007 and 2014. Productivity also grew by less than 0.1% on average across all major European economies between 2007 and 2011, representing a significant loss in potential growth. As uncertainties remain about the future path of growth, business decisions by households and corporates could be adversely affected. Firms will delay investment decisions and consumers will be more cautious, as both assume lower ‘baseline’ rates of growth. This has the potential to become a self-fulfilling cycle as ever-lower expectations lead to increasingly anaemic growth.
These explanations are not mutually exclusive. High levels of debt and lack of investment opportunities could hobble the structural transitions in emerging markets. Equally, the shift to more sustainable growth models may diminish high-return investment opportunities, thus making saving relatively more attractive. In turn, these trends could reinforce perceptions of a ‘new normal’ of slower growth, leading investors to be more pessimistic about investment opportunities. However, while all of these theories may be part of the explanation for slower growth, the appropriate policy response in each case may be very different. For example, secular stagnation implies emphasis on the active use of fiscal policy, while the debt overhang theory highlights the need for public- and private sector deleveraging. And different countries may face different problems. Nevertheless, one common theme is that international cooperation over policy responses is likely to make individual countries’ responses more effective.
