IMF fears global economy is suffering 'secular stagnation'

The International Monetary Fund is coming around to the idea that the world is in the grip of an economic “secular stagnation”, meaning the living standards of future generations will be lower than previously expected and national debt burdens will be harder to reduce.

In a chapter of its latest World Economic Outlook the multinational body concludes that global potential output growth – the total economic output that nations can produce without generating damaging inflation – has fallen significantly in the wake of the 2008-09 financial crisis.

The IMF researchers attribute the decline to an ageing global population and lower capital investment by businesses in both advanced and emerging market economies. The argument that these factors have cut potential growth rates echoes that put forward by the US economist Alvin Hansen, who predicted in the 1930s that the US was experiencing a “secular stagnation” as a consequence of dwindling technological innovation and a drop off in the rate of population growth.

In its study published yesterday, the IMF said: “Potential growth is likely to remain below pre-crisis levels, while it is expected to decrease further in emerging market economies in the medium term. These findings imply that living standards may expand more slowly in the future.”

The IMF said potential growth in advanced economies would increase slightly to 1.6 per cent a year during the rest of the decade but this would be “well below” pre-crisis rates of 2.25 per cent.

In emerging market economies the IMF sees potential growth declining from an average of about 6.5 per cent to 5.2 per cent a year between 2015 and 2020.

Hansen’s secular stagnation thesis was forgotten for a long time because the US – and the rest of the advanced world – experienced a growth spurt in the wake of the Second World War. But it has been resurrected more recently by Larry Summers, the influential former US Treasury Secretary and respected macroeconomist. The thesis is now the subject of a vigorous debate among economic experts and policymakers.

“I would like nothing better than to be wrong, as Alvin Hansen was, with respect to secular stagnation” Mr Summers said in a blog post last week. “But throughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now.”

Ben Bernanke, the former chairman of the US Federal Reserve, sounded a sceptical note last month and suggested that low growth in advanced countries today was a reflection of temporary headwinds and that normal growth rates would return when those headwinds abated.

Yesterday’s IMF study, supporting the stagnation thesis, could be a pivotal moment in the debate. The world’s economic policymakers gather in Washington next week for the spring meetings of the IMF and World Bank.

Despite apparently coming down on the stagnation side, the IMF also stresses that there is “room for optimism”. Among state policy measures that it advocates to lift national economic “speed limits”, it highlights investment in research and development, improved education quality, higher state infrastructure spending, and encouraging more women into work.