IMF Warns Of Long Period Of Lower Growth


April 7, 2015

IMF Warns Of Long Period Of Lower Growth

Ferdinando Giugliano, Economics Correspondent

Most of the world’s leading economies should prepare for a prolonged period of lower growth rates, which would make it harder for governments and companies to bring down their debt levels, the International Monetary Fund has warned.

The warning will reignite fears that the world economy is facing a prolonged period of low growth, which some economists have labelled “secular stagnation”.

The findings, included in one of the analytical chapters of the IMF’s twice-yearly World Economic Outlook, mean that living standards — particularly in the developing world — could grow more slowly than they did before 2008.

They also show that the global financial crisis was worse than previous episodes of turmoil and could have permanently lowered the rate at which economies can expand, rather than only having a one-off effect.

The IMF says that the slowdown in the growth of potential output — or the level of output consistent with stable inflation — has roots going back beyond the 2008 slump. These include an ageing population and a slowdown in the rate of productivity growth in emerging markets.

China, in particular, could see a sharp contraction in the growth of potential output, as it tries to rebalance its economy away from investment and towards consumption.

Growth in potential output in the rich world will be 1.6 per cent a year between 2015 and 2020, the IMF forecasts. This is marginally higher than the rate of expansion in the past seven years, but significantly lower than growth rates before the slump, when potential output expanded at 2.25 per cent a year.

The slowdown for emerging markets is set to be even sharper. Potential output, which continued to expand in the run-up to the crisis, is set to decline from 6.5 per cent a year between 2008 and 2014 to 5.2 per cent in the next five years.

Such a drop in the rate at which economies can grow has consequences for governments in rich countries, which will find it difficult to reduce the levels of debt accumulated during the crisis. It means emerging markets will find it harder to rebuild budget surpluses, which are essential to boosting government spending and cutting taxes during future slowdowns.

Furthermore, the findings have implications for central banks, which may have less room for relaxing monetary policy in the event of future crises.

The IMF, which next week will host its spring meetings in Washington together with the World Bank, has called on policy makers to take action to lift potential growth rates across the world. It says governments in the most advanced nations should support investment spending, which is forecast to remain below pre-crisis levels even if the current economic recovery persists.

The fund is also calling on politicians in emerging markets to implement structural reforms, including improving business conditions and removing bottlenecks to infrastructure spending. They should also make investments to improve education, particularly at the secondary and university level, the fund says.


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