Confidence in the global economy is steadily improving, as shown in the financial markets’ bullish behavior and confident comments from companies and policymakers over the past few weeks. Though these columns have argued in favor of a robust recovery, when investors get uniformly bullish, the pessimistic case deserves attention.
Many distinguished economists believe that the current improvement in global conditions is just a blip. They insist that the world faces years, if not decades, of “secular stagnation.” How seriously should we take them?
The good news is that there is little evidence of secular stagnation in global statistics. The “new normal” for the world economy since 2008 has not been very different from the pre-crisis period. The average growth of the global economy from 1988 to 2007, the 20 years before the crisis, was 3.6 percent, according to the International Monetary Fund World Economic Outlook database. The IMF latest forecast for 2014 is exactly the same — 3.6 percent. Though Christine Lagarde, the IMF managing director, hinted at a modest downgrade this week.
At first glance, this continuity seems hard to square with the slowdown in economic activity in all major economies since 2008. The IMF expects only 2.2 percent growth this year in the developed countries, compared with an average of 2.8 percent during the two decades before the crisis. In the emerging economies, meanwhile, growth is projected at 4.8 percent this year, slightly below the average of 4.9 percent of the pre-crisis decades.
Since both emerging and developed economies have weakened, how can it be that the world economy as a whole has not slowed? The answer is the shifting balance of economic activity from slower advanced economies to faster-growing developing economies.