Subdued Potential Growth: Sources and Remedies

Abstract

Global potential output growth has been flagging. At 2.5 percent in 2013-17, post-crisis potential growth is 0.5 percentage point below its longer-term average and 0.9 percentage point below its average a decade ago. Compared with a decade ago, potential growth has declined 0.8 percentage point in advanced economies and 1.1 percentage point in emerging market and developing economies. The slowdown mainly reflected weaker capital accumulation but is also evidence of decelerating productivity growth and demographic trends that dampen labor supply growth. Unless countered, these forces are expected to continue and to depress global potential growth further by 0.2 percentage point over the next decade. A menu of policy options is available to help reverse this trend, including comprehensive policy initiatives to lift physical and human capital and to encourage labor force participation by women and older workers.

Potential Growth: A Global Database

“…For the production function approach, projections are available for 2022-32. These projections and the methodology on which they are based are presented and analyzed in Kilic Celik, Kose, and Ohnsorge (2023). For the filter-based estimates, forecasts are available up to 2024Q4.…”

“…This was accompanied by strong growth in investment, especially in advanced economies, and a productivity rebound, which together lifted potential growth to prerecession rates globally, in advanced economies, and in EMDEs. However, the impact of this initial rebound in potential growth is likely to be temporary because of the persistent headwinds faced by the fundamental drivers of potential growth (Kilic Celik, Kose, and Ohnsorge 2023).…”

“…Previous studies have limited themselves to a single method of measuring potential growth, such as the production function approach (OECD 2014), or multivariate filters (ADB 2016;IMF 2015). This study builds on earlier work published before the pandemic that utilized several measures of potential growth (Kilic Celik, Kose, and Ohnsorge 2020;World Bank 2018).…”

“…All measures of potential growth show a decline in global potential growth in the decade before the pandemic and that it was internationally widespread. Earlier studies documented the decline for only a subset of measures (for example, Chalaux and Guillemette 2019;Kilic Celik, Kose, and Ohnsorge 2020).…”

Potential Growth Prospects: Risks, Rewards, and Policies

“…Over the period 2011-21, global potential output growth declined 0.9 percentage point per year below its 2000-10 average, to 2.6 percent a year on average (Kilic Celik et al 2023). The weakening of growth was widespread, occurring in both advanced economies and emerging market and developing economies (EMDEs).…”