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World economy stuck in low gear, says IHS

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The global economy is stuck in low gear and, as a result, global growth is expected to hover between 2,5% and 3% in 2016, according to new analysis released at the World Economic Forum in Davos by IHS.
“The world economy is being dragged down by supply-side and demand-side constraints,” says IHS chief economist Nariman Behravesh. “While it is easy to blame the 2008-2009 financial crisis for all the current economic woes, global growth has actually been on a downward trend since 2000.”
The deceleration in long-term trend growth has been caused by two supply-side limitations: the big slowdown in labour-force growth (in some cases into negative territory) and a sharp falloff in productivity growth. Since 2007, demand-side constraints have also been a problem.
“There is nothing inevitable about slow growth. However, it requires governments to enact sensible long-term policies rather than succumb to short-term political expediency,” Behravesh says. “In particular, policies to encourage investment in all the new technologies that are being developed could significantly boost the growth in productivity and GDP.”
The next year or two are likely to see a continuation of the trends witnessed since 2012, with developed economies doing a little better and most emerging markets continuing to struggle.
“Anaemic growth in global trade has added to the woes of export-led economies and this state of affairs is unlikely to change much in the next two years,” Behravesh says. “The severe problems in China’s heavy manufacturing and mining sectors have had an especially damaging impact on commodity markets and the economies of commodity-exporting countries, including Australia and Canada.”
The “rolling routs” in foreign exchange markets (beginning in 2013), commodity markets (beginning in 2014), and stock markets (beginning in 2015) have exacerbated the problems facing emerging markets.
“The good news is that the usual ‘recovery killers’ are a distant threat,” Behravesh says.
First, with a few exceptions, policy tightening is not a danger to recoveries in most parts of the world – in fact, from a global perspective, monetary policy may become a little more stimulative in 2016. Second, the net effect of the commodity rout on global growth is still positive, albeit smaller than before. Third, asset bubbles (and the potential for them bursting) are not a significant hazard. Finally, while the risk of even slower growth in China is high, the impacts on the developed world and commodity-importing emerging markets is limited.
“The one risk that could derail global growth in the near term is a big oil shock, triggered by an escalation of the Middle East conflicts – fortunately, the probability of such an event in 2016 is still relatively low,” Behravesh says.