Min Zhu, deputy managing director at the International Monetary Fund, discusses ongoing structural changes in the global economy. In this video for the World Economic Forum, Min Zhu, exposes the deep scars and challenges left by the recent financial crisis, and says global cooperation for structural reform will be key for a return to growth.
Watch the full presentation above, or read some quotes below.
On underperforming economies
“The global GDP level today is a big drop and it remains under the trend. This is a big gap - we lost all those global GDP in the past seven or eight years permanently. This is very important to understand. This crisis leaves a much deeper scar than anyone ever thought across the whole world, even emerging markets. We permanently lost such a big chunk of real global GDP forever. So we operate the whole global economy at a lower level, that's a very important concept. Because of that all the countries today run under their potential output, so they have an output gap.”
“You see all the advanced economies run under their potential, roughly by one and a half a percent. Even in advanced economies, China is still one percentage point under their potential. The whole world runs under their potential, and the output gap is still quite big.”
“Why do we have such low potential growth? Number one, investments are lower. In the US and Europe, investments are lower. Investments are only higher in China, Brazil and Russia. But in China’s investments are way too high, and need further adjustment. Also trade growth is slower. Trade growth is normally always stronger than global growth rates, but now trade growth is slower than global GDP growth for the first time in thirty years.”
On potential for growth
“The real issues we tried to figure out what will be the potential growth for the next five years? When we talk about potential growth, basically we talk about the potential capital, and productivity growth rates. Potential growth is a concept to match the capacity, to match how much the system can grow. This is a very important concept - this is the base for the growth.”
“Why then do we see the potential capital growth weakening, which is showing investments as lower. We see the labor supplies have weakened dramatically in advanced economies, because of demographic changes and ageing. The issue is that productivity growth is weakening over the whole world. Productivity growth is lower everywhere: in advanced economies, in US, in Europe, in the UK, emerging markets in China in Brazil, Russia, everywhere.”
“The key issue is how can we promote productivity growth? If you look for the five years, you’ll see the potential growth still depends heavily on the productivity growth. That's the real challenge for the next five years. Because emerging market lost quite a bit of potential growth rates. Why have emerging markets slowed down? That’s very simple. In the past ten years, oil and commodity prices have been much higher, and they are now lower. The food price was high. So the commodity cycle is over, and trade value is much lower today. It’s the same for advanced economy. So the external environment is really changed because super commodity cycle is over, trade is weaker and lower interest rate environment is over. Those are big changes with an impact on emerging markets. Advanced economies also have a negative impact on emerging markets and vice versa. We really live together now; we are all linked together.”
“When we move to financial sectors, what we saw is that central bank balances expanded dramatically, particularly in Japan and in all the advanced economies. Roughly an increase from 5% of GDP to 15% of GDP. The key figure is the government debt level. The government debt is way higher than WW1 level, and almost as high as WW2. It’s hard to believe how high governments debts are today. Even in emerging market, debt level is way too high. The high debt level has quite a few impacts. The one key issue is when you have high debt, you have to pay high interest rates. In advanced economies is 2007, the total government debt was 71.6% of GDP. Today, it’s roughly 104.6 % of GDP, so debt has increased roughly 40%. But interest payments were 2.9% in 2007 and are 2.9% today. So, debt has increased by 40% but interest rates remain very low.”