IMF Urges Policies to Boost Demand as Global Recovery Downshifts

The world economy’s growth potential won’t soon return to levels seen before 2008 financial crisis as business investment slumps, raising the urgency for officials to find ways to stimulate demand, the IMF said.

“A large share of the output loss since the crisis can now be seen as permanent, and policies are thus unlikely to return investment fully to its pre-crisis trend,” International Monetary Fund economists said in chapters of the fund’s World Economic Outlook released Tuesday. “This does not imply, however, that there is no scope for using fiscal and monetary policies to help sustain the recovery and thus to encourage firms to invest.”

The Washington-based lender highlights a challenge facing central banks from Beijing to Brasilia: An extended period of low interest rates has yet to trigger a robust acceleration in the global economy. Compounding the sluggish recovery are longer-term issues such as aging labor forces that threaten to limit growth further, the IMF said.

The IMF recommends countries take steps including investing in infrastructure, boosting labor-force participation and reducing regulatory barriers for companies.

“Firms have reacted to weak sales -- both current and prospective -- by reducing capital spending,” the IMF said. “A comprehensive policy effort to expand output would contribute to a sustained rise in private investment.”

Weaker Potential

While potential growth in advanced economies will tick up in the next five years, it will remain well below levels before the financial crisis, the fund said. Emerging nations will see their potential growth decline over the same period, the Washington-based crisis lender said.

Potential output refers to the level of production at which inflation is stable.

In advanced economies, potential growth will accelerate to an average of 1.6 percent over the next five years, compared with 1.3 percent from 2008 to 2014, the IMF said. Still, potential growth will remain weaker than the 2.3 percent pace from 2001 to 2007.

The IMF cites the decline in working-age populations is a major factor, along with sluggish capital growth.

“In some advanced economies, especially in the euro area and Japan, a protracted period of weak demand could further erode labor supply and investment and thus potential growth,” the fund said.

‘Buoyant’ Equities

Still, it said investment could pick up if stock markets remain “buoyant.”

Emerging economies will see their potential growth decline to an average of 5.2 percent from 2015 to 2020, from an average of about 6.5 percent in the 2008-2014 period, the IMF said.

Demographic forces are also a main reason behind the decline, as the growth of the working-age population slows, “most sharply in China,” and in other countries such as Russia and Brazil, the fund said.

Slower potential growth probably means equilibrium real interest rates have fallen, a development that could force central bankers to keep rates near zero, the IMF said. “Monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialize,” it said.

Central banks from China to Norway have cut rates this year as growth outside the U.S. has disappointed. In some countries, such as Denmark and Switzerland, central banks have reduced rates below zero in an attempt to make their currencies less attractive.

In many developed economies, accommodative monetary policy “remains essential to prevent real interest rates from rising prematurely, given persistent and sizable economic slack as well as strong disinflation dynamics,” the IMF said.

The problems are more acute in emerging markets, where “a number of country-specific factors could influence potential growth,” the fund said, citing geopolitical risks that could affect Russia.

The fund’s full global outlook, with economic forecasts for major countries, will be released April 14.

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