## Global Economic Challenges and Opportunities

_IMF News, September 25, 2017_

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## Bibliographic details
- Published: September 25, 2017

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### Overview and key projections
- Speech to the 59th Annual Meeting of the National Association for Business Economics by Tao Zhang, Deputy Managing Director, International Monetary Fund; Cleveland, September 25, 2017.
- IMF July forecast projected global growth at 3.5 percent this year and 3.6 percent in 2018, up from 3.2 percent in 2016.
- U.S. growth projected accelerating from 1.6 percent last year to 2.1 percent this year and next; by early next year, the United States could be experiencing its second-longest expansion since 1850.
- Over the past year in the United States, almost 2.2 million jobs were created.
- IMF outstanding emergency loans are now one-half of their peak in 2012.
- The sharp fall in commodities prices after 2015 contributed to higher borrowing under concessional facilities in the world’s poorest countries.
- From a historical perspective, global growth of 3 and one-half percent is characterized as weak and requires policy action to reinforce labor and capital markets.

### 1. The productivity slowdown — findings and potential explanations
- Finding: A slowdown in productivity growth across advanced, emerging market, and low-income countries following the global financial crisis.
- Puzzling context: slowdown occurs despite significant innovation and technological change across sectors (IT, oil and gas, retail, renewable energy).
- Possible explanations (no consensus on relative impact):
  - Measurement error: data may not capture large parts of the new economy; evidence may explain levels but not the decline in productivity growth.
  - Mismeasurement related to globalization: transfer pricing and other global factors.
  - Increasing share of economic activity not included in GDP: non-market activities (household production, bartering, unpaid services).
  - Innovation may be redistributive rather than productivity-enhancing: growth dividends shifting away from labor toward capital, producing little overall improvement in productivity.
- Conclusion: One, or all, of these explanations could contribute; empirical research has yet to identify the dominant factors.

### 2. Income polarization — evidence and social effects
- Evidence in advanced economies, notably the United States and parts of Europe:
  - In inflation-adjusted terms, more than one half of U.S. households have lower incomes today than they did in 2000.
  - Declining share of U.S. households earning between one-half and twice the median income (the “middle class”).
  - Around two-thirds of those leaving the middle have fallen into the “bottom” (earns less than one half of the median wage).
  - The share of the U.S. population earning less than 50% of median income is rising.
- IMF research links a significant component of income polarization to technological change, specifically automation and off-shoring of semi-skilled tasks that once provided middle-class incomes.
- Distributional impact on demand: growing concentration of income and wealth has reduced aggregate consumption—by about 3 and a half percent over the past 15 years.
- Social and political ramifications: increased dissatisfaction and a swing of sentiment against globalization.

### 2 — Policy recommendations to address income polarization
- Well-targeted social assistance programs.
- Improved access to education and retraining.
- Expansion of the Earned Income Tax Credit, combined with a higher minimum wage.
- Support for working parents to meet child-care costs.
- Paid family leave.
- Purpose: provide opportunities enabling people to take advantage of innovation and entrepreneurship and to mitigate severe social impacts.

### 3. Low inflation and low levels of wage growth — observations and drivers
- Inflation observations:
  - Core inflation in Europe somewhat below the ECB’s goal of below-but-close-to 2 percent.
  - In Japan, headline and core inflation are close to zero.
  - In the U.S., core and headline inflation are both now at 1.4 percent (a reversal after earlier progress toward the Fed’s 2 percent goal).
- Wage growth: nominal wage growth remains relatively low despite labor market strength; United States, Germany, and Japan are assessed as now close to full employment, yet little evidence of wage pressure.
- Structural forces contributing to low wage growth:
  - Decline in productivity growth.
  - Reduced labor market dynamism: job-to-job moves have declined by about 40 percent since the late 1980s; largest wage increases accrue to those switching jobs, so less switching reduces average wage growth.
  - Demographic change (aging populations).
  - Increasing consolidation of companies, strengthening employers’ bargaining power and compressing wages.
- Policy implication: stronger nominal wage growth will be needed to return inflation toward central bank targets.

### 4. Global cooperation — challenges and recommended multilateral approach
- Problem: A more integrated and globalized world economy is no longer generating the jobs and higher living standards that were once promised, contributing to political and social tensions.
- Argument against retreating from globalization or slowing technological change: such actions would neglect the positive outcomes (for example, the impressive reduction of poverty across the developing world).
- Risks of protectionism: interrupting free flow of goods and investments would disrupt trade relations and supply chains and worsen outcomes.
- Recommended course:
  - Maximize benefits of globalization and technology while addressing their negative side effects.
  - Promote a multilateral system that adjusts to an increasingly connected global economy.
  - Ensure a level-playing field that avoids protectionist measures and distortive policies.
  - Mitigate impacts of global transitions through international cooperation and policy coordination.
- Responsibility: both individual countries and the international community should act; strengthening the multilateral system can safeguard the global economy and ensure strong, stable, and inclusive growth.

*International Monetary Fund*

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## References

- [Tao Zhang](https://www.imf.org/en/About/senior-officials/Bios/tao-zhang)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/09/25/sp092517-global-economic-challenges-and-opportunities_