from wermuth
Compared to the heady days before the global financial crisis, China’s real GDP grows at a much slower rate. But at around 6½ percent - the new “normal” -, growth remains impressive; industrial production also expands at such a reduced rate. Imports have risen again (in CNY terms), after a 2-year slump, a sign that domestic demand has recovered, and sentiment indicators have not fallen into contraction territory after all. This has been a big relief for the world economy and the main reason for the turnaround of commodity prices
Foreign trade and an ever more intensive international division of labor are no longer the world’s growth engines. Domestic demand has become relatively more important; it could reflect the rising share of (non-tradable) services in global output or the substitution of trade by direct investments. It remains to be seen whether we are looking here at more than just a temporary phenomenon.
Slow global output growth suggests that the gap between actual and potential GDP will
not shrink. Unused capacities remain large which in turn makes it difficult to raise wages
and prices and to achieve higher inflation rates
long-held view of a rising output gap and, as a corollary, of a serious risk of global deflation. It was based on the assumption that productivity growth would remain more or less unchanged over time. Together with trend employment it determines the growth rate of potential GDP. There is now strong evidence that productivity has slowed significantly, and probably permanently. Potential GDP growth would therefore be slower as well - which reduces or even eliminates the deflation risk.
the significant slowdown of productivity growth is the most important reason
for the dramatic decline of real interest rates on financial assets. Only a new investment
boom can change that trend. For now, investors must familiarize themselves with the
thought that, on average, profit growth will never be as fast as it used to be
Foreign trade and an ever more intensive international division of labor are no longer the world’s growth engines. Domestic demand has become relatively more important; it could reflect the rising share of (non-tradable) services in global output or the substitution of trade by direct investments. It remains to be seen whether we are looking here at more than just a temporary phenomenon.
Slow global output growth suggests that the gap between actual and potential GDP will
not shrink. Unused capacities remain large which in turn makes it difficult to raise wages
and prices and to achieve higher inflation rates
long-held view of a rising output gap and, as a corollary, of a serious risk of global deflation. It was based on the assumption that productivity growth would remain more or less unchanged over time. Together with trend employment it determines the growth rate of potential GDP. There is now strong evidence that productivity has slowed significantly, and probably permanently. Potential GDP growth would therefore be slower as well - which reduces or even eliminates the deflation risk.
the significant slowdown of productivity growth is the most important reason
for the dramatic decline of real interest rates on financial assets. Only a new investment
boom can change that trend. For now, investors must familiarize themselves with the
thought that, on average, profit growth will never be as fast as it used to be