The global economy is acutely vulnerable to a fresh recession with debt ratios at record highs. The authorities have already used up most of their ammunition
The global economy is caught in a low-growth trap as innovation withers and the population ages across the Northern Hemisphere. It will not regain its lost dynamism in the foreseeable future, the International Monetary Fund has warned.
The IMF said the world as a whole has seen a “persistent reduction” in its growth rate since the Great Recession and shows no sign of returning to normal, marking a fundamental break in historical patterns.
This exposes the global economic system to a host of pathologies that may be hard to combat, and leaves it acutely vulnerable to a fresh recession. It is unclear what the authorities could do next to fight off a slump given that debt ratios are already at record highs and central banks are running out of ammunition.
“Lower potential growth will make it more difficult to reduce high public and private debt ratios,” the IMF said in an advance chapter from next week’s World Economic Outlook. “It is also likely to be associated with low equilibrium real interest rates, meaning that monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialise.”
The developing world is likely to limp on with average growth of just 1.6pc from 2015 to 2020, too little to make a dent on the edifice of public debt left from the Great Recession.
The Fund said global bourses have charged ahead of reality, soaring to new highs despite a 25pc slump in levels of business investment since 2008. There has been a chronic lack of spending on the sorts of equipment and computer software that drive gains in competitiveness. “This development is worrying, because business investment is essential for supporting the economy’s future productive capacity,” it said.
“In some countries, weak business investment has contrasted with the ebullience of stock markets, suggesting a possible disconnect between financial and economic risk taking,” it said.
The great hope is that booming asset prices will trigger a surge of investment, allowing economic fundamentals to catch up with markets. But it is far from certain that this will happen unless governments change policy and launch a blitz of spending on infrastructure and research to unlock frozen capital and set off a virtuous circle.
While the IMF has supported quantitative easing in the past, the implicit message is that this form of stimulus chiefly has the effect of boosting asset prices and has proved a very blunt tool for the real economy, at least in the manner currently conducted. It cannot fully counter the effects of fiscal austerity.
The IMF says Europe and the US began to falter at the turn of the century. Total factor productivity growth – the primary driver of wealth-creation – slid from 0.9pc to 0.5pc even before the collapse of the financial system in 2008.
The emerging world has since succumbed to the same malaise as it runs into structural barriers and exhausts the low-hanging fruit from easy catch-up growth, forcing the IMF to downgrade its global growth forecasts repeatedly since 2011.
Productivity in these countries has almost halved from 4.25pc to 2.25pc since the Lehman Brothers crisis and is likely to fall further as they hit the “technology frontier”, where the middle income trap lies in wait for any that fail to adapt in time. Many need root-and-branch reforms of their product and labour markets, and an assault on excess regulation.
The report almost seemed to describe a spent world where the great leap forward from the computer age and the internet is already over and little more can be squeezed out of universities as the “marginal return to additional education” keeps falling.
Casting a shadow over all else is the demographic crunch. The working-age population will be shrinking at a rate of 0.2pc a year in Germany and Japan by 2020, with Korea close behind, and China following on hard. Almost the whole of Eastern Europe faces an ageing crisis.
Whether the world really is nearing the end of its growth miracle is a hotly disputed theme. Ben Bernanke, the former chairman of the US Federal Reserve, insisted in a recent inaugural blog for the Brookings Institution that the US economy would right itself naturally as so often before.
He reminded pessimists that leading economists fretted about the end of growth in much the same way during the Great Depression. Harvard’s Alvin Hansen – the leading American Keynesian of his age – coined today’s vogue term “secular stagnation” in 1938, arguing even then that population growth was slowing and the big advances in technology were mostly finished.
He lived long enough to witness three decades of spectacular global progress after 1945.