The potential for secular stagnation has been a consistent theme of this blog; in other words, we should entertain the idea of slow (or even zero growth) as a possible norm–and plan our lives so that we fully recognise this risk. Meanwhile, the discussion of permanently slower growth has migrated from ‘crankdom’ to mainstream in five short years, and now even the IMF is humming the same tune.
This week, the IMF pre-released a chapter from its flagship World Economic Outlook publication. The chapter is titled “Where Are We Headed? Perspectives on Potential Output“. It starts off by pointing out that in advanced economies growth was coming off even before the Great Recession hit in 2008 (on all charts, click for larger image):
As the above chart shows, potential output growth can be divided into three components: 1) employment growth (more people or longer hours), 2) capital growth (more machines and computers) or 3) total factor productivity (better educated people plus innovation). The big decline was in the last category, which flies in the face of all the breathless cornucopian stories we here: tales of technology abolishing every human ill or want.
Furthermore, the IMF now increasingly recognises two stark realities. First, ageing societies will act as an increasing drag on growth in not only advanced but also emerging market economies and, second, total factor productivity gains are slowing in emerging economies as these countries get closer and closer to the innovation frontier of the advanced economies (moving from catch-up to caught-up). Continue reading