Weekly Economic Briefing

Fading potential

18 July 2017

Global Overview

  • Potential growth rates have been slowing across advanced and emerging economies over a number of years. In many cases this reflects deteriorating demographics, sluggish investment and weak productivity.
  • If left unaddressed, fading potential growth will exacerbate concerns over public and private debt levels, and risk entrenching low interest rates. Fortunately, there is a range of product and labour-market reforms that can help reverse some of the damage done. However, political will is required.
  • It is a long time since the US could grow sustainably at 3% and potential could now be around half of this rate, highlighting the need for reform. The UK has experienced a similar deterioration and needs to address its anaemic productivity.
  • Low potential growth is a well-publicised problem in the Eurozone and France provides the latest test case for reform. However, Japan’s recent experience warns that the results will be disappointing if reform efforts are too tentative.
  • Deteriorating demographics, a slowdown in investment and less catch-up potential pose risks to growth in China. Policymakers will need to achieve far- reaching reforms to prevent a structural slowdown in potential growth.
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US

While there is a broad range of views around the current US potential growth rate, there is at least a consensus that this has slowed. Reversing this trend looks challenging.

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UK

The potential growth rate has been on a downward trend in the UK, with poor productivity the key culprit. The government should take aggressive action to rectify this malaise.

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Europe

Headline Eurozone growth is firing on all cylinders, but potential remains subdued. France may be the next locus for potential-boosting reform, if President Macron can hold his nerve.

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Japan & Developed Asia

Japan has implemented reforms to boost potential growth. However, the progress is unlikely to prove sufficient for policymakers to meet their objectives.

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Emerging Markets

Potential growth in China is likely to slow over coming years, unless policymakers are able to achieve deep and far-reaching reforms.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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