NEWS Release - We Need Forceful Policies to Avoid the Low-Growth Trap - Posted on September 1, 2016 - by iMFdirect - By Christine Lagarde
Low growth, high inequality, and slow progress on structural reforms are among the key issues that G20 leaders will discuss at their meeting in Hangzhou, China, this weekend.
This meeting comes at an important moment for the global economy. The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time.
2016 will be the fifth consecutive year with global GDP growth below its long-term average of 3.7 percent (1990-2007), and 2017 may well be the sixth (Chart 1). Not since the early 1990s—when ripple effects from economic transition caused growth to slow—has the world economy been so weak for such a long time. What has happened?
In advanced economies, real growth is running almost a full percentage point below the average of 1990-2007.
Many are still plagued by crisis legacies, such as private and public sector debt overhangs, and impaired balance sheets of financial institutions. The result has been stubbornly weak demand.
The longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity and unemployed workers are leaving the labor force and critical skills are eroding. Weak demand also depresses trade, which adds to disappointing productivity growth.
On the supply side, slowing productivity and adverse demographic trends are weighing on potential growth—a trend that started before the global financial crisis. And with little expectation of stronger growth tomorrow, firms have even less incentive to invest, which hurts both productivity and short-term growth prospects.
Emerging economies have also been slowing—but from an exceptionally fast pace of growth in the past decade. Their slowdown is therefore more a return to the historical norm. Developments within emerging economies are quite diverse. In 2015, for example, GDP in two of the four largest economies—China and India—grew between 7-7½ percent, while GDP contracted by close to 4 percent in the other two—Russia and Brazil. But there are important common factors:
One is the rebalancing of the Chinese economy from investment to consumption, and from external demand to domestic demand.
While a stable Chinese economy growing at sustainable rates is ultimately good for the world economy, the transition is costly for trading partners that rely on Chinese demand for their exports. It can also trigger bouts of financial volatility along the way.
The second, related, development is the large decline in commodity prices, which has taken a toll on disposable income for many commodity exporters. The adjustment of commodity exporters to this new reality will be difficult and protracted. In some cases, it calls for a change in their growth model.
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