What’s holding back economic growth?

The International Monetary Fund (IMF) has revised its outlook for 2015 global growth to 3.1%, down from the 3.3% it forecast back in July. It’s the weakest growth since the financial crisis, and shows how much economies are struggling to get back on track: “A return to robust and synchronized global expansion remains elusive,” Maurice Obstfeld, the IMF’s economic counsellor, warned.

Source: IMF and CNN

Advanced economies have on the whole experienced modest growth in 2015 – particularly the US and the UK, and to a lesser extent the Eurozone and Japan.

But it’s a different story for emerging and developing economies, which account for a large and increasing share of global gross domestic product. They have been badly affected by the slowdown in China – more than previously expected – and their growth rates are set to shrink for the fifth consecutive year.

While the IMF predicts most of these countries will “rebound” in 2016, those that rely heavily on commodity exports have been worst hit: weak commodity prices could see them lose 1 percentage point of growth each year between 2015 and 2017, compared to the period between 2012 and 2014. Energy-exporting nations could lose 2 ¼ percentage points over the same period.

A turbulent summer

The latest forecast comes in the wake of a volatile summer for global financial markets, with tumbling commodities prices, declines on the Chinese stock market, economic turmoil in Europe,  and equity-market downturns. All of these factors “point to a somewhat weaker recovery in 2015 and 2016 than previously envisaged,” the report notes.

Political upheaval, particularly the ongoing refugee crisis, has also spooked investors and dampened global growth: “Political conflict has created a large global stock of displaced persons, both within and across borders. The economic and social costs are immense.”

History repeating itself

One question experts have been debating is whether the 2008 financial crisis and the recession that followed are having a long-term negative effect on growth levels and productivity. As the following chart shows, output in both the Eurozone and the United States has evolved on a lower path relative to pre-recession trends:

Source: IMF

This seems consistent with previous recessions. Research carried out by US economists found that of 100 recessions in 23 advanced economies since the 1960s, the majority of them were followed by extended periods of lower output compared to the pre-recession trend. Of course, correlation does not mean causation, but the findings leaves many wondering if and how we can reignite the engines of growth, seven years after the financial crisis.

A way out?

The IMF recognize that no single set of policies will work for all countries, although they do suggest policy-makers everywhere seize this opportunity to put in place structural reforms, which could “raise productivity and remove bottlenecks to production”. In the Eurozone this means lowering disincentives to employment and providing better-targeted training programmes; in the US this includes immigration reform, which could boost labour supply, the IMF says.

The report also calls on countries to consider investing in infrastructure while long-term real interest rates remain low, and making the most of low commodities prices to reform energy subsidies and taxes.

For emerging and developing economies, the IMF research suggests the external environment will get tougher before it improves, and they need to brace themselves for this by addressing external vulnerabilities. America’s imminent interest rate increase – the first since the financial crisis – will also create some challenges they must start preparing for.

Whatever the policies they choose to put in place, most countries have their work cut out as they fight to reverse an even more worrying trend: the IMF’s apparent over-optimism in its economic forecasts, which suggests global growth could end up being even lower than predicted.

Author: Stéphanie Thomson is an Editor at the World Economic Forum

Image: A street sign for Wall Street hangs in front of the New York Stock Exchange. REUTERS/Lucas Jackson