Recent improvements in the near-term growth outlook for the advanced economies are not expected to be sustained over the medium-term, says Fitch Ratings in a new report.
“While we have become more optimistic about advanced country growth prospects in 2017 and 2018, our latest assessment of medium-term growth potential suggests that this year and next could be more or less as good as it gets,” said Brian Coulton, Chief Economist at Fitch.
New projections of supply-side potential GDP growth for the advanced economies covered in Fitch’s Global Economic Outlook (GEO) suggest underlying growth performance over the next five years will lie in the 1.25% to 1.75% range for most of the 10 advanced GEO countries. The demographic outlook is set to deteriorate further and we do not see a major turnaround in productivity performance after the slowdown witnessed over the last decade or so.
Nevertheless rising labour force participation rates – as more women enter the labour force and more “over 65s” stay in jobs or return to work – give some grounds for encouragement from recent supply-side performance. Furthermore, Germany’s success in reducing structural unemployment since the mid-2000’s shows the benefits to potential GDP that can accrue from labour market reforms.
US potential growth is projected at 1.8% p.a. This compares with long-run historical average growth of just below 3%, with the deterioration primarily reflecting demographics. UK potential growth is estimated at 1.7% relative to long-term average GDP growth of 2.2%. A structural slowdown in UK productivity over the last decade is only expected to be partially reversed. Potential growth for Germany and France is similar at around 1.2% but the mix differs markedly with a better outlook for productivity in Germany offsetting significantly worse demographics. Spain’s potential growth is in a similar range even though it has recently seen significantly faster actual growth.
Australia is expected to see the best supply-side performance over the next five years with potential growth of 2.4%, reflecting strong population growth and healthy labour productivity. At the other end of the scale, potential growth in Japan and Italy is projected at just 0.7% and 0.4%, respectively. Demographics weigh very heavily in Japan although this is partially offset by surprisingly robust productivity. Italy has, however, seen persistently falling productivity levels over the last 10 years.
The scope for growth to exceed supply-side potential rates over the medium-term as economic slack is absorbed is also limited. Output gaps – ie the shortfall in the level of actual GDP from potential GDP – are estimated to have been modest in 2016 for most advanced countries and with 2017 growth generally forecast to be faster than potential, they are narrowing. Only in Spain and Italy is the current negative output gap judged to be large enough to expect actual growth over the next five years to materially exceed its estimated supply-side potential rate.
