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World—Falling productivity growth drags on economic prospects
The global economy has demonstrated remarkable resilience to recent shocks. However, medium term prospects for growth in world output and trade remain the lowest in decades. Expectations for medium term growth have been revised down across all income groups and regions, most significantly in emerging markets (Chart). Dimmer growth prospects in China and other large emerging markets—that account for an increasing share of the global economy and Australian exports—will transmit through highly integrated supply chains. IMF research suggests that global growth could stagnate at just 2.8% by the end of the decade, without policy interventions or technology breakthroughs. That’s a drop of 1 ppt from pre-COVID levels.
Over half of the decline in global growth owes to a marked deceleration in productivity growth—the ratio of output to resources consumed. In advanced economies, annual productivity growth fell from 1.4% during 1995–2000 to 0.4% after the pandemic. Emerging markets productivity fell from 2.5% during 2001–07 to 0.8%. The slowdown reflects a retreat in labour force participation amid population ageing, weaker business investment, and—most importantly—persistent structural frictions that prevent resources from being allocated to more productive firms, including regulatory barriers, rigid labour markets, financing constraints and lack of trade openness. Ongoing geoeconomic fragmentation will limit cross-border flows of goods, services, capital and workers, thereby reducing the scope for efficiency gains from specialisation and competition.
Former Italian Prime Minister and European Central Bank President Mario Draghi’s recent European Competitiveness report warns that stagnant GDP growth could lead to unsustainable public debt. This reflects historically high public debt-to-GDP ratios, potentially higher real interest rates and rising spending needs for decarbonisation, digitalisation and defence. Expectations of weaker growth could also deter investment in capital and technology, and so, may become self-fulfilling.
