IMF sees low potential economic growth around world

The world's growth potential took a big hit after the 2007-2009 financial crisis and is likely to lag for years, implying that interest rates should likely stay low for quite a while, the International Monetary Fund said in a study on Tuesday.

Potential growth, which gauges how fast economies can grow over time without hitting inflationary speed bumps, already was slowing in richer economies before the financial crisis due to aging populations and a drop in technological innovation.

But declines in private investment and employment growth cut annual potential growth in these countries to 1.3 per cent between 2008 and 2014, half a percentage point lower than before the crisis, according to the IMF study.

“A large share of the output loss since the crisis can now be seen as permanent, and policies are thus unlikely to return investment fully to its pre-crisis trend,” IMF economists said.

The IMF recommended countries take steps including investing in infrastructure, boosting labor-force participation and reducing regulatory barriers for companies.

“Firms have reacted to weak sales - both current and prospective - by reducing capital spending,” the IMF said. “A comprehensive policy effort to expand output would contribute to a sustained rise in private investment.”

The study, part of the Fund’s twice-yearly World Economic Outlook, could frame the discussions over how to boost growth when the world’s economic policymakers gather in Washington next week for the IMF and World Bank’s spring meetings.

Over the next five years, advanced economies’ annual growth potential should increase to 1.6 per cent, still below pre-crisis growth rates, making it more difficult to cut high public and private debt, the IMF said.

With interest rates low, “monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialize,” the IMF said.

It also said weak demand in the euro zone and Japan could prompt even lower potential growth than forecast. The study comes ahead of the Fund’s global economic forecasts next week.

In emerging markets, potential annual growth fell to 6.5 per cent from 2008 to 2014, about 2 percentage points lower than before the crisis, and is expected to fall further to 5.2 per cent over the next five years as populations age, structural constraints curb capital growth, and productivity slows.

A projected drop in growth potential for China, the world’s second largest economy, could be even deeper as it transitions away from an investment-led economy to a consumption-based one, the IMF said.

The Fund urged rich economies to support demand and investment, including more funding for research and development and infrastructure. Emerging economies should also boost infrastructure spending, get rid of excessive regulation, and improve the quality of education, it said.

Agencies