During 2004–06, the world economy enjoyed its most rapid growth since the late 1960s and early 1970s. Global output has on average increased by 5.2 percent per year (see chart). After controlling for increases in the working-age population, world growth has been 3¼ percent—only slightly lower than during the 1960s.
Not only has recent global growth been high, it has also been more stable, even though potentially more volatile emerging market and developing countries account for a rising share of the global economy.
A chapter in the October 2007 World Economic Outlook, titled “The Changing Dynamics of the Global Business Cycle,” takes stock of what we know about changes in output volatility and in the resilience of expansions. The research, which covers a broad sample of regions and countries, focuses on determining to what extent policy actions have helped bring about a lasting reduction in volatility.
A new golden age?
In important ways, the global economy has recently displayed greater stability than observed even in the 1960s—the last golden age of strong and stable growth. In particular, output volatility has decreased in most countries, with the typical country experiencing a one-third decline between the 1960s and the present. Growth is also more broadly shared across countries than previously observed, with virtually all countries doing well.
Advanced economies in particular improved their stability, and typically experienced long expansions, after the 1970s and the disinflation of the early 1980s.
Background: From 2004 to the present, world growth has been much more rapid than at any time since the early 1970s. It has also been shared more widely across countries and has been more stable.
Analysis: Reduced output volatility and the associated lengthening of economic expansions reflect improvements in monetary and fiscal policy, as well as in broader institutional quality. These changes are expected to keep output volatility low going forward.
Policy implications: Unfortunately, lower volatility does not rule out occasional recessions. The abrupt end to the period of strong and stable growth of the 1960s and early 1970s and the Asian crisis of the 1990s remind us of what can happen if policymakers do not respond to new risks and challenges.
In contrast, output stabilization in developing countries was more gradual and modest. Until the beginning of this decade they often experienced deep and sometimes recurrent crises, including debt crises (especially in Latin America and Africa) and banking and currency crises (in Asia, central and eastern Europe, and Latin America). Some countries also experienced high volatility during their transition from centrally planned to market economies. On average, output volatility in developing economies remains more than twice as high as in advanced economies.
A new golden age?
Source: IMF, World Economic Outlook.
1The index of output volatility is the rolling 10-year standard deviation of detrended real GDP growth in a typical (median) country. The dispersion of growth is measured as the standard deviation of detrended real GDP growth in the sample of 133 countries.
Our analysis suggests that the strong durability of expansions and low output volatility largely reflect changes that are likely to prove permanent. In particular, better monetary policy may explain about one-third of the total stabilization of output fluctuations over time. More stable fiscal policy (in advanced economies) as well as trade liberalization and broad institutional improvements (in developing economies) also helped.
The decline in world output volatility between the 1960s and the present largely reflects lower volatility of consumption rather than of investment. Any explanation for the recent stability should, therefore, include factors that affect consumer behavior, such as the rising availability of financing, which helps smooth consumption over time.
Risks have not gone away
Despite these improvements, future stability should not be taken for granted. Low average volatility does not rule out occasional recessions, and globalized trade and financial flows have generated new risks and vulnerabilities. Most recently, losses associated with the U.S. subprime mortgage market have raised concerns about a possible global credit crunch.
Significant potential risks also arise from global current account imbalances and from the linkages between monetary and prudential policies and sustained asset price booms.
Martin Sommer and Nikola Spatafora
IMF Research Department