Aug 11 2016

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“The new normal.” “Lower for longer.” “Secular stagnation.” The phrases that define the public debate on our economic future hardly bring cheer to the soul.

The belief that the slower growth world is here to stay now seems accepted in most policy circles – and the International Monetary Fund’s (IMF) revisions from its key release in 2011, 2013 and most recently 2015, show an organisation coming to terms with the fact that medium-term growth will be slower than expected. You can see why – the IMF’s growth downgrades have been merciless.

Employment situations are solid in many developed economies: the US and UK unemployment rates have been hovering around 5 per cent for the past several quarters, the unemployment rate for the eurozone and Japan have also been falling month after month, and policymakers and economists are more or less pleased with their labour markets. But the output produced by all these working people has not been stellar.

Potential growth comes from more people and productivity. The outlook for both has rarely been worse. The labour force seems set to grow at an ever-slower pace as population growth slackens and the proportion represented by the elderly rises rapidly. The global population is growing at less than 1 per cent year-on-year, and that means the world’s share of people aged over 65 – typically those who are heading into retirement – is increasing. In 1960, over-65s made up 9.7 per cent of the world’s population. By 2020, their share is projected to be above 15 per cent. With fewer people making up the workforce, we would hope they could make more goods, provide more services and do more things, but productivity has reached a plateau. We are now getting less output from the same number of workers than we were before the financial crisis.

Theories abound on what drives productivity: investment, regulation, financial systems, technological transfer, debt levels, necessity, to name just a few. Each can credibly be said to explain part of the dramatic slowing we have witnessed since the Great Recession. None promises salvation.