Large economies have size­able neg­a­tive out­put gaps

Financial Mirror (Cyprus) - - FRONT PAGE -

Eight years af­ter the fi­nan­cial cri­sis, many large economies con­tinue to have size­able neg­a­tive out­put gaps, say PwC econ­o­mists. This gap in­di­cates the amount of spare ca­pac­ity in an econ­omy by es­ti­mat­ing how close it is to op­er­at­ing at its po­ten­tial level of out­put.

Of the G7, Italy is fur­thest adrift with France and Ja­pan still run­ning be­hind the GDPweighted av­er­age for the group. Only Ger­many and the UK are near to clos­ing the gap.

“We don’t ex­pect this to change soon, since our main sce­nario sees global growth of around 2.5-3% this year, the fifth year of be­low trend growth mea­sured in mar­ket ex­change rate terms,” says Richard Boxshall, Se­nior Econ­o­mist, PwC.

At the coun­try level, the re­cent data has been mixed. The Eu­ro­zone grew at an en­cour­ag­ing rate of 0.6% quar­ter-on-quar­ter in the first quar­ter of the year – higher than ex­pected and slightly above trend.

In con­trast, the US grew at a lethar­gic rate of 0.1% quar­ter-on-quar­ter; and the UK also saw growth slow to a slightly-be­low-trend rate of 0.4% in the first quar­ter.

So what could help boost growth rates? One po­ten­tially at­trac­tive ap­proach is to in­vest more in in­fra­struc­ture. Do­ing this ef­fec­tively is a nec­es­sary con­di­tion to go­ing be­yond boost­ing short-term de­mand and to en­sure the sup­ply­side of the econ­omy grows more strongly in the long term.

Based on their in­fra­struc­ture project ex­pe­ri­ence, PwC’s econ­o­mists have set out four prin­ci­ples for pol­i­cy­mak­ers to keep front-of-mind when con­sid­er­ing where to tar­get in­vest­ment:

- En­sure it meets a need: iden­tify cur­rent and fu­ture needs, sup­ple­ment­ing the base case anal­y­sis with a range of sce­nar­ios in­clud­ing op­ti­mistic and pes­simistic cases.

- En­sure con­sis­tency with other ob­jec­tives: in­fra­struc­ture projects should fit with the govern­ment’s broader pol­icy agenda, in­clud­ing so­cial and en­vi­ron­men­tal as well as eco­nomic goals.

- En­sure the num­bers add up: for gov­ern­ments with a rel­a­tively low net debt po­si­tion and healthy pub­lic fi­nances (e.g. Ger­many and Canada), em­bark­ing on an in­fra­struc­ture-led pro­gramme seems like a sen­si­ble way to boost ag­gre­gate de­mand and long-term sup­ply ca­pac­ity. But even where bud­get deficits re­main rel­a­tively high – as in the UK – there could be a case for pri­ori­tis­ing in­fra­struc­ture in­vest­ment over cur­rent spend­ing.

- En­sure it will ben­e­fit the wider econ­omy: as­sess­ment of the po­ten­tial im­pact should fac­tor in both the long-term ef­fects as well as the di­rect and in­di­rect im­pacts rel­a­tive to a sce­nario where the project does not go ahead.

“In re­sponse to the Great De­pres­sion in the 1930s, the US en­acted the Pub­lic Works Ad­min­is­tra­tion, in­vest­ing $6 bil­lion in in­fra­struc­ture over a num­ber of years (equiv­a­lent to around 11% of US GDP in 1933, the year the PWA was es­tab­lished) to kick start growth and pro­duc­tiv­ity,” con­cluded Richard Boxshall.

“This type of in­vest­ment is once again be­ing touted as the key to un­lock our low growth en­vi­ron­ment – but the ef­fec­tive­ness of this pol­icy will ul­ti­mately de­pend on how many shovel-ready projects in dif­fer­ent economies meet the prin­ci­ples we’ve out­lined.”

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