Blanchard notes that estimates of long-term potential growth have come down by 0.5 to 1 per cent since 2007. The reasons? Ageing and low productivity growth. Blanchard writes:
Productivity growth has been much lower since 2007, more so in Europe where the rate has declined by over 1 per cent in major countries, than in the US, where it has only declined by 0.5 per cent. This decline reflects in part cyclical factors and the effect of lower capital accumulation. But there is more to it: for the US at least, the evidence points to a slowdown in underlying productivity, starting before the crisis and reflecting the end of a period of successful implementations of IT innovations. The safe assumption is that the high pre-crisis productivity growth rate was unusual, and we should expect lower underlying productivity growth in future.Expectations of the future feed into the present. When people believe that things aren't going to be a lot brighter in future, they will cut back on spending, whether investment or consumption. That will affect the ongoing recovery in the advanced world. Lower growth in the advanced world will impact emerging markets through lower demand for exports and a drop in commodity prices. Add to this the slowdown in China because of problems internal to that country and the picture is complete.
Blanchard believes there's little that policy can do to change the picture- neither negative interest rates nor helicopter money can change the long-term reality.
If this is correct, we in India should be bidding goodbye to growth of over 8 per cent in the medium-term. For 2016-17, the upper end of the range forecast by the finance ministry, 7-7.75 per cent, should be a challenge.
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