IMF fears “secular stagnation” for global economy

THE International Monetary Fund is coming round to the idea that the world is in the grip of an economic "secular stagnation", meaning the living standards of future generations will be lower than previously expected and national debt burdens will be harder to reduce.

In a chapter of its latest World Economic Outlook the multinational body concludes global potential output growth - the amount of economic output that nations can produce without generating damaging inflation - has fallen significantly in the wake of the 2008-09 global financial crisis.

The IMF researchers attribute the decline to an ageing global population and lower capital investment by firms in both advanced and emerging market economies. The argument that these factors have cut potential growth rates echoes that put forward by the US economist Alvin Hansen, who predicted back in the 1930s that the US was experiencing a "secular stagnation" as a consequence of dwindling technological innovation and a drop off in the rate of population growth.

"Potential growth is likely to remain below pre-crisis levels, while it is expected to decrease further in emerging market economies in the medium term" said the IMF in its study, published today. "These findings imply that living standards may expand more slowly in the future".

The IMF said potential growth in advanced economies will increase slightly to 1.6 per cent a year during the rest of the decade   but this will be "well below" pre crisis rates of 2.25 per cent. In emerging market economies the IMF sees potential growth declining from an average of about 6.5 per cent to 5.2 per cent a year between 2015 and 2020.

Hansen's secular stagnation thesis was forgotten for a long time because the US - and the rest of the advanced world - experienced a growth spurt in the wake of the Second World War. But it has been resurrected more recently by Larry Summers, the influential former US Treasury Secretary and respected macroeconomist. The thesis is now the subject of a vigorous debate among economic experts and policymakers.

The former chairman of the US Federal Reserve, Ben Bernanke, sounded a sceptical note last month and suggested that low growth in advanced countries today is a reflection of temporary headwinds and that normal growth rates will return when those headwinds have abated. Yesterday's IMF study, supporting the stagnation thesis, could be a major moment in the debate. The world's economic policymakers gather in Washington next week for the IMF and World Bank's spring meetings.

However, despite apparently coming down on the stagnation side of the argument, the IMF also stresses that there is still "room for optimism" and that the future of global potential output is not "set in stone". Among state policy measures that it advocates to lift national economic "speed limits" it highlights investment in research and development, improved education quality, higher state infrastructure spending and encouraging more women into work.

There is some disagreement among economists over the meaning of secular stagnation. There are some who stress the supply side, arguing that slower growth is mainly attributable to an unavoidable slowdown in technological innovation. Others, including Mr Summers, regard secular stagnation primarily as a chronic consequence of a shortfall in global demand - or spending - which will have second round effects on the economy's supply side.

"I would like nothing better than to be wrong as Alvin Hansen was with respect to secular stagnation" said Mr Summers in a blog post last week. "It may be that growth will soon take hold in the industrial world and allow interest rates and financial conditions to normalize…But throughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now."



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