Thursday, April 9, 2015

Ageing populations may curb advanced economies' growth

Apr 09, 2015

IMF warns that they face lower living standards if they don't boost productivity

 WASHINGTON - Advanced economies face limits on future growth due to the drag from ageing populations, unless they can boost productivity through technology and infrastructure investment, the International Monetary Fund (IMF) said.

A higher proportion of aged citizens means a smaller workforce and lower potential output, which in turn could spell lower living standards in the future, the IMF said on Tuesday, citing a new study.

The phenomenon of lower potential growth is increasingly evident in some advanced economies, and it is looming over emerging markets like China, where the average age of the population is rising.

The study, part of the IMF's semi-an-nual World Economic Outlook, seeks in part to explain why advanced economies have remained so turgid in the wake of the financial crisis which began in 2008.

Of the key inputs to growth, the supply of capital for investment has expanded, though more slowly than expected. But labour pools have grown even more slowly, as measured by the level of participation by a population in the active workforce.

A key part of the reason for that is that more people have retired or will retire compared to the level of entrants into the job market.

The result is a drag on the potential increase in output, or economic growth, the study says.

Over the next five years, advanced economies' annual growth potential should increase to 1.6 per cent, still below pre-crisis growth rates, making it more difficult to cut high public and private debt, the IMF said.

With interest rates low, "monetary policy in advanced economies may again be confronted with the problem of the zero lower bound if adverse growth shocks materialise", the IMF said.

It also said weak demand in the euro zone and Japan could prompt even lower potential growth than forecast. The study comes ahead of IMF's global economic forecasts next week.

In emerging markets, potential annual growth fell to 6.5 per cent from 2008 to 2014, about 2 percentage points lower than before the crisis, and is expected to fall further to 5.2 per cent over the next five years as populations age, structural constraints curb capital growth, and productivity slows.

A projected drop in growth potential for China, the world's second-largest economy, could be even deeper as it transitions away from an investment-led economy to a consumption-based one, the IMF said.

"Increasing potential output is a policy priority for advanced and emerging market economies," it said. The prescriptions differ, but focus mostly on the need to expand investment.

The IMF urged rich economies to support demand and investment, including more funding for research and development and infrastructure.

It added that structural reforms and greater support for research and development are key to increasing supply and innovation.

Emerging economies should also boost infrastructure spending, get rid of excessive regulation, and improve the quality of education.

"In emerging market economies, higher infrastructure spending is needed to remove critical bottlenecks, and structural reforms must be directed at improving business conditions and product markets," the IMF said.

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