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Policymakers Need to Give More Weight to Long-Term Growth

by internationalbanker

By Creon Butler, Director of the Global Economy and Finance Programme, Chatham House





Predictions of historically low long-term global growth threaten development goals and wider economic resilience.

A striking aspect of the International Monetary Fund’s (IMF’s) latest “World Economic Outlook” (WEO),1published last month, is the forecast that global growth over the next five years will average just 3 percent per annum, the lowest such growth forecast in all WEO reports since 1990. This compares with a peak five-year growth forecast of 4.9 percent in 2008.

Some factors behind this are not a cause for concern, such as the rapid economic progress made by countries such as South Korea and China, which means there is less scope for catch-up in the future, or the gradual decline in global population growth, which feeds through into lower labour-force growth.

But the lower forecast also reflects deliberate policy choices by governments around the world. While some of these may have good justifications in non-economic terms, the net effect is to reduce substantially the prospects for global growth over the long term.

The IMF has highlighted two main policy areas likely to be responsible for future weaker growth:

The first is the growing range of restrictions on the free flow of goods, services, capital and ideas. Examples include Russia’s full-scale invasion of Ukraine, which has forced an unprecedented package of economic sanctions by the G7 (Group of Seven advanced major economies); the United Kingdom’s decision to leave the European Union (EU); and US restrictions on Chinese access to information and communications technologies (ICT) driven by concerns over national security and, arguably, strategic competition.

The IMF has estimated that one aspect of this—the barriers to the free flow of foreign direct investment (FDI) linked to the fragmentation of the global economy into geopolitically aligned blocks—could lead to a cumulative reduction in global output of 2 percent on its own.

The second is an expected slowdown in structural economic reforms. While the reasons have not been spelt out, they are likely to include the impacts of populism, lack of transparency and, in some cases, corruption at the national level on the speed and quality of decision-making. The efforts of some industrial lobby groups to delay or abort essential actions on climate change are a good illustration.

Alongside this is the breakdown in trust among the major global economic powers, which is contributing to a failure to agree on essential international reforms. The failure so far to address properly the problem of debt distress in low-income and emerging economies is a powerful example, as is the slowness to secure the relatively modest amount of funding needed to ensure future pandemics are not as damaging as COVID-19 has been.

Another factor expected to contribute to lower long-term growth is the scarring effects of the pandemic and, in particular, the damage to human capital. The latter varies from country to country but includes the deterioration in population health (through missed or delayed operations), forgone education due to prolonged school closures and retreat of older skilled workers from the labour market.

Furthermore, the accelerating impacts of climate change—with rising incidences of extreme weather events and the growing likelihood of major policy shocks—could yet prove the most important factor depressing long-term growth, unless urgent action is taken.

If the IMF’s forecast is borne out, the effects would be widespread, further reducing the scope for economic reform in some countries, increasing the risk of political conflicts in others and undermining resilience vis-à-viseconomic and environmental shocks across the board.

These outcomes could, in turn, feed back on overall growth prospects in a negative spiral, affecting development goals in both advanced and developing economies.

But improving on this outlook will not be straightforward. Any comprehensive strategy will likely mean accepting difficult trade-offs—risking political unpopularity, facing down special-interest groups and/or accepting a worse short-term growth outcome in return for better performance over the long term.

Three policy areas should be at the core of the effort:

The first is the nexus of policies on inflation, public debt and financial stability. A top priority here must be to convince the financial markets and general public in the major advanced countries that the global surge in inflation that occurred in 2022-23 is a one-off policy error that won’t be repeated.

Achieving this will mean maintaining the pressure on core inflation in the short term through sufficiently high nominal interest rates while taking prompt and decisive actions to deal with any knock-on effects on financial stability (as seen in US authorities’ latest action on Republic Bank).

This is needed to avoid a substantial new inflation risk premium becoming permanently embedded in real interest rates worldwide. It will also enable at least part of the reduction in debt-to-GDP (gross domestic product) ratios, which has been an unintended (and yet welcome) byproduct of the inflation shock, to be translated into a permanent reduction in the real burden of debt. Thus, in April 2021, the IMF projected that the US debt-to-GDP ratio in 2023 would be 132.4 percent, compared with the latest projection for 2023, which is more than 10 percentage points lower. But if real interest rates remain high over the medium term, this gain will quickly be eliminated.

At the same time, it will be important to allow the eventual normalisation of nominal interest rates at more traditional positive levels, given the damage the extended period of ultra-low rates since the Global Financial Crisis (GFC) is likely to have done to business productivity.

Second is the interaction between geopolitics, economic security and maintaining open trade and investment relations. Janet Yellen, the United States secretary of the Treasury, argued in a recent speech on United States-China economic relations that “China’s economic growth need not be incompatible with US economic leadership”, and US national-security actions “are not designed for us [the US] to gain a competitive economic advantage or stifle China’s economic and technical modernisation”.

In this context, the Biden-Harris Administration must promptly demonstrate that it intends to fulfil these objectives by ensuring that any further national-security actions in the economic space are well thought through and tightly targeted to minimise broader economic disruptions. Restraint of this kind is likely to be unpopular with many members of Congress. Moreover, there is no guarantee that it will stabilise economic relations with China and prevent further economic fragmentation, particularly if China does not reciprocate by showing greater willingness to cooperate with the West in addressing international priorities, such as sovereign-debt distress, climate change and global health threats. But it is an essential starting point.

Third is the need, particularly in fast-changing policy areas such as climate mitigation and artificial intelligence (AI), to deploy economic regulation proactively but also optimally—in other words, in a manner that makes full use of current knowledge, manages wider risks to society and optimises in economic terms the mix of subsidies and regulations.

Thus, where rapid and far-reaching change is known to be needed with a high degree of certainty, as in the transformation of the global economy to achieve net zero, the required regulatory changes should be implemented as quickly and comprehensively as possible, even if this means higher short-term costs to consumers. This is because delay will further increase the economic damage and humanitarian suffering already being caused by climate change. The resulting policy certainty will also reduce the cost of financing the enormous public and private investment that is needed to make the transformation.

Similarly, in responding to growing fears about the future misuse of AI by businesses and governments, the priority should be to intensify monitoring and develop trial regulatory frameworks, but without, as some AI specialists have suggested, putting a comprehensive short-term ban on further development and deployment. Such a ban could prove very damaging in economic terms while also being difficult, if not impossible, to implement worldwide.

Paying more attention to long-term growth requirements while meeting immediate policy needs will require international policymakers to “walk and chew gum” at the same time.

It is also by no means new. The 2009 Pittsburgh G20 Communique, which set out the game plan for the G20 (Group of Twenty) to steer recovery from the Global Financial Crisis, committed its members “to launch a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth”.

But, as in 2009, it is critical for policymakers in major economies to prioritise collectively the goal of strong, sustainable, long-term global growth and rebalance current policies with this in mind. Not only does this approach stand the best chance of rebuilding international trust and cooperation, but it is also, overall, the most effective way to manage the exit from today’s cumulation of economic crises to meet long-term development goals and build resilience.



1 International Monetary Fund (IMF): “World Economic Outlook: A Rocky Recovery,” April 2023.



Creon Butler leads the Global Economy and Finance Programme at Chatham House. Prior to Chatham House, Creon served in the UK Government’s Cabinet Office as the Director for International Economic Affairs in the National Security Secretariat and G7/G20 “sous sherpa”. He was also the British Deputy High Commissioner in New Delhi and has served in senior positions at HM Treasury and the Bank of England.


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