Global economic growth is slowing. The world economy continues to expand, but at a smaller growth rate than in recent years. The outlook isn’t much better.
In fact, the IMF keeps revising its forecast downwards, as do the forecasters tracked by FocusEconomics. It turns out that the expected growth isn’t much off than the historical average. Advanced economies are will not accelerate from current tepid growth, but emerging economies will gradually improve.
Fact: The global economic outlook is not worse than normal
The IMF forecast for world GDP in 2017 is 3.4 percent growth (inflation adjusted). The long-run average, calculated since 1970, is 3.6 percent. That’s not much different. It seems weak because previous forecasts had been up around 4.0 percent.
We’ve had years with more than five percent growth. But the current forecasts are not that bad. Even if we take a narrower slice of history, say 1990 through 2015, we get just 3.6 percent growth. So maybe it’s not so bad. Population growth is lower than the long-run trend by about 0.3 percent a year (1.2 recently compared to 1.5 historically), so per capital GDP growth is not bad.
Forecast 1: Advanced economies will not accelerate from current growth rate
The advanced economies seem sluggish, and indeed their growth rates have been trending lower even aside from the 2008-09 recession. It’s harder for the advanced economies to grow. They have already educated most workers, increased female labor force participation, run their companies near the cutting edge of technology. Also, politics in the advanced countries generally favors the social safety net over stronger economic growth.
Europe certainly has potential to grow more rapidly, but lingering problems from the financial crisis limit growth. Brexit adds a huge dose of uncertainty, slowing business capital spending. The migrant crisis diverts a large amount of public spending. There may be labor force benefits from the migrants, but that will take quite some time to develop.
The United States has low unemployment, but business leaders are glum, as I noted in Faster Economic Growth: Can Capital Spending Get Us Going Again? There’s room for faster spending growth, but I don’t see an accelerant on the horizon. Productivity growth has slowed for reasons that are not clear. Thus, reasons to expect a reacceleration of productivity are unclear.
Forecast 2: Emerging economies will gradually reaccelerate
Emerging Asian countries, including China, found that slower growth hurts the construction sector and its suppliers (such as steel and cement). That leaves room for a cyclical bounce-back.
China’s growth had been running 10 percent plus, then decelerated to nine percent, and now is at 6.7 percent. The numbers are unreliable, but the big picture of slower growth is no doubt accurate. Growth slowed partly because wages had risen, making Chinese production less attractive on world markets.
However, there is still a large gap between wages in China and in advanced countries. In addition, the rising middle class in China is stimulating a great deal of domestic demand. The same story is playing out in many other emerging economies.
The emerging countries with a manufacturing base will bounce back from their current slower growth.
Other emerging countries are primarily commodity producers, exporting crops or minerals. They have suffered as downward revisions of global commodity demand clobbered prices. They too will bounce back after the effects of reduced capital spending work through the economy.
Emerging countries don’t have a real strong rebound ahead of them, but somewhat better growth than this year or last.
Rolling all the countries together, I expect slightly better global economic growth in 2017 and 2018, but not enough for the world as a whole to feel boomy. The appearance of sluggish growth is because we’ve been better in the past—and because we have the potential to do better, but the world is not living up to its potential.