Why Has the Economic Growth Pace Slowed in Advanced Economies?
The IMF staff report
The IMF (International Monetary Fund) staff presented a “Global Prospects and Policy Challenges” report ahead of the two-day G20 Finance Ministers and Central Bank Governors Meeting in Ankara, Turkey, in September 2015.
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The report noted that global economic growth is moving at a moderate pace primarily due to weaker-than-expected growth in advanced economies. It’s also due to a slowdown in emerging economies.
What led to the weak recovery in advanced economies?
Weak productivity growth
According to the IMF staff, weak productivity growth is primarily responsible for the slowing pace of economic growth in advanced economies. The above graph shows the economic growth projections by the IMF for the world and advanced economies.
Citing the example of the US, the IMF staff indicated that in 1H15, the US economy grew by 1.80%—compared to 3.80% in 2H14. A fall in productivity growth, the labor dispute at the US West Coast ports, a harsh winter, and a fall in capex in the energy sector (XLE) due to a fall in energy prices have been the primary reasons that held back a stronger economic recovery in the US. Unwilling consumers (XLP), especially in the first quarter of the year, have had a large impact on US economic activity. Meanwhile, a strong dollar (UUP), that had companies like Groupon (GRPN), Pfizer (PFE), and Omnicom Group (OMC) concerned about their 2015 revenue, is holding exports back.
In Europe (VGK), economic growth was stronger-than-expected in Ireland, Spain, and Italy. However, a surprising weakness in German economic growth held the region’s economic output back in 2Q15, according to preliminary estimates. However, the weak euro is helping exports.
In Japan (EWJ), economic growth contracted by 1.20% in 2Q15. This was less than the 1.60% contraction estimated earlier. Japan’s economy has been plagued by a fall in business investment and consumer demand. A fall in exports has only made the situation worse.
From advanced economies, let’s move on to the state in emerging and developing economies.