Friday, February 26, 2016

The Disappointing Global Growth Scenario - The Economic Performance Gap

In the recently released 2016 version of the Economic Report of the President (of the United States), we find a handful of interesting graphs that look at the poor performance of the global economy since the Great Recession of 2008 - 2009 and how the situation has deteriorated over the past five years.  The report also provides us with the reasons why this recovery hasn't really felt like the economic recoveries of the past.  

While the United States economy has performed moderately well in recent years, the same cannot be said for the global economy as a whole.  Those of us that follow the mainstream financial media have noticed a consistent downward shift in economic growth projections for both emerging and advanced economies over the past five years in particular.  This is particularly obvious on this graphic which shows how the global economy has continued to produce disappointment after disappointment:

The solid black line represents the actual global growth for each year and the dotted lines show the forecasts made between September 2011 and January 2016 for real global GDP growth out to 2020.  It is quite clear that, since 2012 in particular, global economic growth has been increasingly under pressure.  As well, since the Great Recession, for the most part, global economic growth has been well below the pre-crisis average of between 4 and 5 percent.

Not only does the IMF have problems getting its growth forecasts to reflect the new global economic reality.  In November 2015, the Organization for Economic Co-operation and Development (OECD) projected that global growth would be 2.9 percent in 2015 and 3.3 percent in 2016, down significantly from their projections of 3.8 percent and 3.7 percent made just one year earlier.  The slowing global growth, particularly among the nations that the United States trades with, is having a substantially negative impact on the American economy. 

What has caused this substantial and unexpected (at least to the IMF and OECD) slowdown in the rate of growth for the global economy?  Here is a figure that shows the growth of GDP per working-age person from 2011 to 2014 compared to the period between 2002 and 2007 (prior to the Great Crisis) with the 45 degree line marking unchanged growth rates between the two periods:

The United States and Japan are the only two major, advanced economies that are growing at the same rate both before and after the Great Recession.  While low income countries have seen their per capita real GDP growth rate increase since the Great Recession, the Euro Area, high income economies, middle income economies, India, Brazil and China have all experienced slower post-crisis real GDP growth rates.  This slackness has led to a significant gap between actual growth between 2010 and 2015 and the projected economic growth from October 2010 as shown on this figure:

Overall, the level of output from G-20 nations is 6 percent smaller in 2015 than what the IMF had predicted in 2010 (using the pre-Great Recession economic performance yardstick of 4 to 5 percent growth as noted above)  and growth in the last five years has fallen short of what was predicted in 18 out of the 20 G-20 economies with only Turkey and Saudi Arabia showing slightly better performance than was predicted (although, with low oil prices, it is highly unlikely that Saudi Arabia is still on the positive side).  As we can see, the economic performance gap is very significant for both China and India, two of the world's largest economies; these two nations alone account for about half of the 6 percent underperformance of the G-20 economy.  Even the United States with its good growth levels in terms of GDP per working-age person has shown a growth shortfall of 3.2 percent.

In addition to the slowing growth of GDP per working-age person that I noted above, global economic growth levels have been negatively impacted by dropping labor productivity growth which is defined as the ability of nations to produce more output from the same amount of labor inputs.  During the last half of the 20th century, G-7 nations had average labor productivity growth rates near or above 2 percent annually.  These rates have all dropped and, in some cases to nearly zero.  In fact, labor productivity growth for for Japan is predicted to be one-sixth of its annual rate from 1999 to 2006 and for the euro area, one-third of its pre-Great Recession average.

One additional factor that has led to a slowing growth rate in the economy is the slowing growth in the labor force of various nations as you can see on this figure:

As the population ages, the labor force participation rate has continued to decline; the proportion of the population that is working-age peaked at 66 percent in 2012 and is projected to drop continuously as the world's population ages.  This has created additional headwinds to economic growth levels since a major contributor to a nation's real GDP growth is simply its population growth since growing populations provide additional demand for goods and services.  Aging populations put significant pressure on government budgets at the same time as they are contributing less to economic growth, a situation which has already taken hold in Japan which has faced stagnant economic growth for the past two decades.

As we can see, there are significant global economic headwinds that have appeared since the Great Recession.  It really is different this time.  These headwinds which include lower per capita GDP growth rates, dropping labor productivity growth rates and a slowing in growth of the labor force are issues that unprecedented central bank intervention have been completely incapable of defeating.  This suggests that the next recession could be more painful than average and that the post-next recession economic expansion will be even more modest than the post-Great Recession recovery....which, really hasn't felt like much of a recovery to millions of people around the world.  


  1. There never was a recovery their was pulling of demand forward in time. But demand doesn't increase or decrease. Central banks were able to pull demand forward but now we are in the future and there is little demand you cant keep pulling it forward. Demand now has to catch up and during this time economies will be very slow. Central banks created this problem and will probably make it worse since they are screwing up natural economic forces at play.

    1. Well said, other than spelling and grammar...