Has the world economy reached peak growth?

By Jim O’NeillFriday, 17 January 2020

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At the start of a new decade, many commentators are understandably focused on the health of the global economy. This upcoming decade gross domestic product (GDP) growth will likely be lower than during the last decade, barring a notable improvement in productivity in the West and China, or a sustained acceleration in India and the largest African economies.

The global GDP growth for the 2010-2019 decade will likely be around 3.5 percent per year – though until we have the final fourth-quarter data for 2019, we won’t be able to calculate.

This average GDP means that many countries fell short of their potential. In principle, global GDP could have increased by more than 4 percent, judging by the two key drivers of growth: the size of the workforce and productivity. In fact, the 2010s could have been the strongest decade of the first half of this century. But it didn’t turn out that way. The European Union endured a disappointing period of weakness, and Brazil and Russia each grew by much less than in the previous decade.

The prospects for the coming decades are even less strong. China’s labor-force growth is now peaking, and the populations of Japan, Germany, Italy, and other key countries are aging and in decline. True, some countries and regions that underperformed in the teens could now catch up; but much will depend on the realization of several positive developments.

Given the EU’s demographics, it would take a significant improvement in productivity to boost the rate of GDP growth. More expansionary fiscal policies in many countries could produce a temporary acceleration this year and perhaps through 2021. But it is hard to see how a stimulus-driven expansion could be sustained much beyond that point. Europeans can talk all they want about “structural reform.” But without effective productivity-enhancing measures, the EU’s growth potential will remain in decline.

As for Brazil and Russia, it would be highly disappointing if both countries were to register the same weak growth of the past decade. Yet, to achieve 3.5-4 percent annual growth from around the current 1 percent annual growth would probably require another commodity-price boom, in addition to major productivity enhancements. Given that both countries tend to eschew reform whenever commodity prices are booming – a classic symptom of the “commodities curse” – it is doubtful that either will reach its potential this decade.

In China, a further deceleration in trend GDP growth is highly likely, owing to demographic realities. In light of China’s investments in technology and shift to more domestic consumption, productivity certainly could improve. But whether that will be enough to overcome China’s other well-known challenges remains to be seen.

For its part, the United Kingdom could achieve stronger growth this decade, but it could also suffer a slowdown, depending on how it deals with Brexit and its aftermath. In any case, the country’s influence on global GDP is likely to be modest.

Then there is the United States, where annual growth potential appears to be just over 2 percent. Without more fiscal stimulus and an indefinite continuation of ultra-easy monetary policies, it is difficult to see how the US could exceed this rate. Moreover, it has been more than a decade since the US experienced a recession. Were that to happen in the months or years ahead, the US would have an even smaller chance of reaching its growth potential for the 2020s.

Last but not least are the still-smaller economies with enormous growth potential. While countries such as Indonesia - and perhaps Mexico and Turkey - are becoming more relevant in an assessment of global GDP, it is India that promises to have the largest influence in the 2020s and beyond. The country’s demographics will remain in an economic sweet spot for at least another decade.

Were the Indian government to adopt the right mix of growth-enhancing reforms, it could easily achieve annual growth in the range of 8-10 percent. And, because India is already close to being the world’s fifth-largest economy, that would have a significant influence on global GDP growth. The problem, of course, is that the current government has shown no indication that it will pursue positive reforms. On the contrary, it has launched a debilitating new culture war.

That leaves Africa. As matters stand, no African economy is large enough to influence global GDP on its own. But, as a region, Africa’s GDP is close to that of India, which means that if enough of its major economies can achieve strong growth, the effects will be felt more broadly. The rise of Africa seems both desirable and inevitable to me. Whether the continent can drive global GDP growth will be a key question for the coming decade.

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Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.

Last Update: Friday, 17 January 2020 KSA 

The Fed might be in denial about the next recession

Jeff Spross

The Fed is stuck. 

The economic models that have guided monetary policy in recent decades say low unemployment should lead to higher inflation. When that happens, the Fed should respond by hiking interest rates, a move that also readies the Fed to fight the next recession by cutting rates back down.

Right now, however, the Fed faces remarkably low unemployment, low inflation, and low interest rates all at once, leaving the central bank with nowhere to go. Thus, everyone's wondering what the Fed can do when the next recession eventually comes, and whether the monetary policy toolkit needs an update. The central bank is currently taking a long and hard look at itself, with conclusions and any potential reforms due out later this year. But if a conference featuring former Fed Chair Ben Bernanke over the weekend is any indication, Fed officials aren't thinking nearly far enough outside the box.

First, the central bank is justifiably concerned that any significant effort on its part to increase interest rates could ruin the recovery or even cause the next recession. After cutting interest rates all the way to zero to combat the Great Recession, inflation hasn't justified a hike ever since. The Fed tested out some slow and modest interest rate hikes in the last few years, but in January it concluded even that was too much, and started cutting again. The central bank's interest rate target is currently between 1.5 and 1.75 percent with no indication it's rising again any time soon. Typically, it's taken an interest rate cut of around five percentage points for monetary policy to meaningfully combat economic downturns, and needless to say, you can't cut interest rates by 5 percentage points when they're only 1.75 percentage points above zero.

Now, former Fed Chair Ben Bernanke may not be in charge of the central bank any more, but his thinking is certainly indicative of the mainstream on this topic. And his presentation this weekend was strangely optimistic. Essentially, Bernanke thinks that the interest rate cuts the Fed can make, plus two of the more unusual tools it deployed in the Great Recession will be enough to combat the next downturn.

Specifically, those two tools are forward guidance and quantitative easing. "Forward guidance" is basically a fancy term for the Fed doing a better job communicating its long-term plans and intentions to the financial markets. The idea here is that if the Fed makes it abundantly clear, for instance, that it's going to keep interest rates low until inflation picks back up significantly, investors will be willing to pump more money into the economy and take more risks than if they were less sure about the Fed’s determination to not hike. As for quantitative easing, that was the policy where the Fed bought lots of longer-maturity Treasury bonds and other financial instruments in an effort to lower long-term interest rates. Normal monetary policy only targets short-term interest rates, again through bond purchases and sales, as well as other tools more recently. Ultimately, quantitative easing aims to boost the economy by getting more investment into the economy over a longer time horizon.

Bernanke calculates these two policies could achieve a combined effect equal to cutting short-term interest rates by three percentage points. Add that to an actual cut in short-term rates back to zero, and you could get a boost roughly equivalent to a 5-percentage point cut.

Now, why did I call this "strangely optimistic?"

First off, as Bernanke himself admits, he's assuming the natural rate of interest is slightly higher than the Fed's current target. The "natural rate" is that ideal sweet spot where employment is at a maximum and inflation is stable. In other words, Bernanke is assuming the Fed is already stimulating the economy with its current stance. But if he's wrong, then even his proposed policies won't actually deliver the boost he's anticipating. And given how agonizingly tepid and slow the recovery from the Great Recession was and continues to be, it seems that chances are pretty good Bernanke is overestimating the natural rate.

There's also the question of whether a five percentage point boost will actually be enough. It certainly wasn't enough to launch a speedy recovery after the 2008 collapse. Yet that crisis was also unusual in its depth and severity. But what about the 2001 recession? It was a much more standard downturn, and the Fed was able to cut by five percentage points without bumping up against the zero lower bound. Even then, unemployment recovered so slowly that it only got to 4.4 percent when the Great Recession hit — it never got back to its pre-2001 low of 3.9 percent. The portion of prime-age workers who have jobs — which has actually been performing better recently as a metric of economic health — also never got back to its pre-2001 high before the 2008 recession knocked it down again. The unspoken hole in Bernanke's assessment is that the last recovery from a normal recession that a five percentage point cut delivered was completely inadequate.

This is part of a much larger problem bedeviling the Fed, which is that the economy has been weakening for decades, with interest rates having to go lower and lower to boost it, without ever being able to get back to their previous peaks. Bottoming out at zero is the inevitable result.

Most of the other suggestions coming out of the Fed's rethink propose some version of softening the Fed's resistance to inflationary risk. In practice, that would mean cutting short-term interest rates further right now — possibly all the way to zero — in the hopes of boosting the recovery, eventually justifying higher rate hikes back up before the next downturn hits. Though that involves its own fingers-crossed risk-taking as much as Bernanke's framework: if the boost isn't enough to drive the necessary economic upturn, there's no fallback.

The problem is more promising avenues — such as using the Fed's powers to guarantee state-level infrastructure spending, or to combat the trade deficit — would require the Fed to step well outside of the conceptual limits that have separated monetary policy from fiscal policy. Thus far, that's a line the central bank has been loath to cross, even as it stares down the barrel of its own increasing impotence

   

The Capitalist Crisis and the Tendency of the Rate of Profit to ...

https://www.marxist.com › the-capitalist-crisis-and-the-tendency-of-the-rat...

Dec 18, 2012 - “According to Ricardo's theory of rent, the rate of profit has a tendency to fall, as a result of the accumulation of capital and the growth of the population, because the necessary means of subsistence rise in value, or agriculture becomes less productive.

Is there a tendency for the rate of profit to fall? Econometric evidence for the U.S. economy, 1948-2007

 Deepankar Basu∗ Panayiotis T. Manolakos† June 24, 2010 

Abstract 

The law of the tendential fall in the rate of profit has been at the center of theoretical and empirical debates within Marxian political economy ever since the publication of Volume III of Capital. An important limitation of this literature is the absence of a comprehensive econometric analysis of the behaviour of the rate of profit. In this paper, we attempt to fill this lacuna in two ways. First, we investigate the time series properties of the profit rate series. The evidence suggests that the rate of profit behaves like a random walk and exhibits “long waves” interestingly correlated with major epochs of U.S. economic history. In the second part, we test Marx’s law of the tendential fall in the rate of profit with a novel econometric model that explicitly accounts for the counter-tendencies. We find evidence of a long-run downward trend in the general profit rate for the US economy for the period 1948-2007.