Is low growth the new normal for advanced economies?
Advanced economies have been experiencing decelerating growth for a number of years with projections that this will continue for some time. So much so, that many economic commentators have described low growth as the “new normal”. The underlying reason for the declining growth rates is widely debated although some of the obvious culprits are the massive increases in global debt and the persistent decline in productivity. Whether these are the cause of low growth or merely a symptom of a wider issue is unknown. While it is often referred to as a recent issue, growth rates throughout the world have actually been declining since the 1970s.
The low growth theories
Some of the theories behind the slowing growth rates have included:
- Increasingly protectionist policies causing a slowdown in trade and manufacturing
- High levels of public and private debt
- Lack of investment at a company and government level
- Subdued productivity growth
- Growing inequality
- An aging population in advanced economies
It is possible that all of these factors have a role to play. Certainly, if you look at the first three issues there has clearly been a significant decline in trade and investment, and also consumption since 2017:
A global avalanche of debt
Debt levels have been building around the world for the last 50 years. According to the World Bank there have been four “waves” of debt accumulation since 1970. The latest wave began in 2010 and is “the largest, fastest, and most broad-based increase in [emerging and developed economy] debt than any of the previous waves.”
One study has estimated that a country’s economic growth drops off significantly when debt reaches 90 percent or more of GDP. According to the study, countries with 60–90 percent debt have an average growth rate of 3.4 percent, compared to 1.7 percent for countries with more than 90 percent growth.
Currently the countries with the biggest public debt burdens — all over that 90 percent mark — include Japan, Singapore, the United States, and a good number of the European Union countries.
Private debt has also been accumulating at a great rate over the same period, but while increasing public debt can slow economic growth, it is only when individuals start deleveraging (and allocating more of their disposable income to debt repayments) that growth is dampened.
Falling or tepid productivity
One of the more concerning trends affecting most of the world in recent years has been the declining levels of productivity. Productivity growth has fallen globally from 2.3 percent in 2003–08 to 1.8 percent in 2013–18. And the impact has been broad-based, affecting more than 70 percent of advanced economies.
Many advanced countries have suffered from falling productivity for decades, a trend that has become more pronounced since the 1990s. This is despite rapid technological advancement over that period which is generally linked to higher productivity growth.
The reasons behind the declining rates of productivity are widely debated but there is little consensus. Productivity is an important piece of the low-growth puzzle as declining productivity results in a lower standard of living and is the most important determinant of economic growth.
Impacts of an aging population
Another important factor that tends to support economic growth is increases in the size of the labour force. However, a worldwide decline in fertility rates coupled with an aging population means these are unlikely to prop up growth in the future.
The proportion of the population aged over 60 is expected to increase in almost every OECD country between now and 2050. It’s likely that this will have a dampening effect on economic growth. However, according to the National Bureau of Economic Research, an aging population in itself only moderately slows economic growth. This is because it is generally balanced by people working for longer and policy responses such as increasing the legal retirement age.
Is low growth such a bad thing?
There have been calls in some quarters for a change of focus from the insistence on continued high growth. Low growth may mean people work fewer hours or use fewer resources, but that may not be such a bad thing. The flipside though, is that falling GDP means fewer resources are available to invest in education, infrastructure and social security. At a time of rapid technological advancements, low growth also means less investment is available, which in turn leads to slow capital investment in new technologies and infrastructure to support future growth. A low growth economy also means it is easier for countries to slip into a recession, which only compounds the low growth environment.
What can we do about it?
There are recent signs that the slowdown may be stabilizing, however, the consensus is low growth is likely to stick around for some time.
While monetary policy has supported growth in recent years for advanced economies, including New Zealand, in the words of the IMF Chief Kristalina Georgieva “it will not be the saviour of economic growth”. In many cases, there is also not a lot of room to continue to cut rates in order to support weakened economies.
The best bet for the world is to solve the persistent productivity puzzle or to recalibrate, adapt and learn to thrive in a new low growth environment.