It is a misconception that the global economy is growing below potential, one nurtured not least by the IMF's over-optimistic medium-term economic forecasts of the past five years, which regularly had to be lowered markedly at every subsequent forecast round. At around 2.5% (measured at market exchange rates), the global economy has been growing close to its potential over the past five years. There is no growth momentum to be regained, and I do not expect any additional expansion to materialize in the coming years.
The slowdown from the pre-crisis global economic growth rates of 3%-4% can entirely be accounted for by demographics - more precisely, by the decline in the rate at which the potential labor force (people aged between 20 and 64) is increasing. Since the outbreak of the Great Financial Crisis, the annual expansion of the global potential labor force has slowed significantly, from growing at 1.9% in 2007 to growing at 1.1% this year. In Europe, it is now declining in fact. It has fallen by 0.5% this year, after still increasing by 0.6% in 2007 and peaking in 2011? a negative swing of more than one percentage point in less than a decade. And in China, the deceleration is even more pronounced: the potential labor force will top out this year and fall as of next year, after having risen by as much as 1.9% in 2007.
Once potential labor supply is adjusted for, current global economic growth rates come in line with the averages prior to the crisis, and thus do not justify the extremely loose stance of global monetary policy. I am afraid that the increasing marginal negative side effects of unconventional monetary policies are now outweighing its declining marginal benefits, and that monetary policy has turned from providing support to being an obstacle to economic activity, particularly in the Eurozone. Unconventional monetary policies are mitigating the need for other policies to step in and undertake overdue reforms. In Europe, what is most needed are a restructuring of excessive debts and banking systems, a reform of social security, and a liberalization of labor markets.
The current monetary policy stance in many countries and negative interest rates in particular may not only postpone necessary solutions, but may even aggravate the underlying problems. Not only do negative rates encourage nations to go even deeper into debt, foster boom and bust cycles, they also incentivize capital misallocation, undermine social security systems, and ultimately threaten financial stability.
The deceleration of the global potential labor force will continue. In addition, the ratio of the retired to working population will increase, and escalating taxes and social security contributions will widen the tax wedge and further discourage economic activity. As long as monetary policy reduces the pressure for enacting genuine structural reform, which would, among other things, raise the labor force participation rate, I do not expect global economic growth to pick up in the coming years.
Axel A. Weber is the Chairman of UBS Group AG.