WASHINGTON: The world’s growth potential took a big hit after the 2007-2009 financial crisis and is likely to lag for years, implying that interest rates should likely stay low for quite a while, the International Monetary Fund said in a study yesterday.
Potential growth, which gauges how fast economies can grow over time without hitting inflationary speed bumps, already was slowing in richer economies before the financial crisis due to aging populations and a drop in technological innovation. But declines in private investment and employment growth cut annual potential growth in these countries to 1.3 percent between 2008 and 2014, half a percentage point lower than before the crisis, according to the IMF study.
The study, part of the Fund’s twice-yearly World Economic Outlook, could frame the discussions over how to boost growth when the world’s economic policymakers gather in Washington next week for the IMF and World Bank’s spring meetings.
Over the next five years, advanced economies’ annual growth potential should increase to 1.6 percent, still below pre-crisis growth rates, making it more difficult to cut high public and private debt, the IMF said. With interest rates low, “monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialize,” the IMF said.
It also said weak demand in the eurozone and Japan could prompt even lower potential growth than forecast. The study comes ahead of the Fund’s global economic forecasts next week.Reuters
