The International Monetary Fund (IMF) has warned of “new policy challenges” ahead as governments struggle to adapt to the post-crisis environment of lower growth in both developed and emerging markets.
Productivity growth has declined across the globe, the IMF said in its latest update to its World Economic Outlook, making it more likely that interest rates would remain lower in multiple jurisdictions for an extended period.
“In both advanced and emerging market economies, lower potential growth will make it more difficult to maintain fiscal sustainability,” the authors wrote. “It is also likely to be associated with low equilibrium real interest rates, so that monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialize.”
In “advanced” economies,
including the US and the Eurozone, potential growth—defined as the predicted
output of a region without inflationary pressures—has fallen from roughly 2% in
2006-07 to 1.5% in 2013-14. Potential growth in emerging markets declined by 2
percentage points in the same period.
In the next five years, the IMF forecast advanced economies to experience a slight rise in potential output, but said it would remain materially lower than in the past due to ageing populations.
In emerging economies, the fund said potential growth could decline further rather than recovering, due to ageing populations and “structural constraints”. This slowdown was likened to that experienced by developed markets in the 1990s and early 2000s as the rate of technological improvements slowed.
“Increasing potential output is a policy priority for advanced and emerging market economies,” the IMF said.
“In advanced economies, continued demand support is needed to offset the effects of protracted weak demand on investment and capital growth as well as on unemployment. Structural reforms and greater support for research and development are key to increasing supply and innovation.
“In emerging market economies, higher infrastructure spending is needed to remove critical bottlenecks, and structural reforms must be directed at improving business conditions and product markets and fostering human capital accumulation.”
The full update, “Where Are We Headed? Perspectives on Potential Output”, can be viewed on the IMF’s website.
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