What the economic forecasts don’t say
It is clear developed economies are far from squeezing out that much-needed growth Special to Gulf News
the amplitude of the swing is double, from about 4 per cent to 1.5 per cent. But all of the G7 economies share this phenomenon, because their ageing populations are growing more slowly, withdrawing from the labour market.
Whether productivity, or output per hour, will continue to languish is hard to predict. But data are data, and they show quite clearly that productivity growth has been languid for some time.
Fewer future resources
The growth of potential output is not just an economist’s abstraction. If the expected path of income turns south, we will have fewer future resources to meet our needs. To the extent that we have consumed and borrowed now in anticipation of higher income, disappointment is in store.
There certainly is scope for disappointment in advanced economies, considering that gross general government debt is hovering around 106 per cent of nominal GDP and fiscal deficits are stretching beyond the forecast horizon.
In economies with a recent record of fiscal restraint, including Australia, Canada, and New Zealand, the private sector has been borrowing hand over fist. In times of distress, private-sector mistakes often become public-sector obligations.
The machinery of representative government works best when it is used to apportion a growing economic pie. For example, when the US economy was experiencing 4 per cent trend growth, real GDP could be expected to double in 18 years, comforting parents about their children’s economic future. At the current trend of 1.5 per cent growth, the period needed to double GDP stretches to 48 years, darkening the economic prospects of the grandchildren.
In those circumstances, will elected officials make the hard decisions needed to get from economic stabilisation to sustained recovery?
Carmen Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government. Vincent Reinhart is Chief Economist for Standish Mellon Asset Management.