The global financial crisis was a scarring experience for rich economies. A sharp, short-term decline in GDP has given way to a steady erosion in growth expectations. Yet as the latest “World Economic Outlook” from the International Monetary Fund (IMF) explains, emerging economies are also entering an age of diminished hopes.
Potential output is an estimate of an economy’s speed limit—how rapidly it can grow before inflationary overheating sets in. It is determined by growth in the labour force, the capital stock and productivity. The IMF reckons that potential growth in advanced economies was already on the decline in the years before the crisis, thanks to weak productivity growth and ageing workers. The crisis then squeezed investment, amplifying these problems. Potential annual growth, which averaged 2.2% in 2001-07, fell to 1.5% in 2013-14.
The IMF reckons potential growth should rebound a bit in the rich world in coming years. But emerging economies face a more persistent slowdown. Demography is catching up with some of them: China’s working-age population is already declining. Productivity growth will slow as the scope for catch-up growth between rich and poor countries continues to narrow. Economic disappointment, it seems, is an increasingly global affair.