Pre-Crisis and Post-Crisis Economies

While economic confidence levels are slowly on the rise, the fact remains that the global economy is growing at a significantly slower pace today than in the years before 2008’s financial crisis, despite the fact that emerging markets with higher growth potential make up a larger share of the global economy today than they did before the crisis.  Of course, it was this financial crisis that set the stage for the relatively sluggish growth of the past nine years, and its effects are still being felt today.  Prior to the crisis, developed economies were growing much faster than they are now, while emerging market growth was accelerating thanks to the globalization of the economy that resulted from the integration of emerging markets such as China, India and East Europe into the global economic system.  Since the crisis, developed economies have struggled to record growth approaching pre-crisis levels, while emerging market growth, particularly for emerging markets outside of Asia, has slumped over the past few years.  There are many factors for this slower growth, and the longer this sluggish growth continues, the more likely it becomes that global economic growth will remain well below the levels of the previous decade.

The period before 2008’s financial crisis was a time when the global economy grew at a faster pace than at any time in the past 50 years.  This was due to a number of factors.  First and foremost, emerging market growth soared in the years before the financial crisis, averaging annual growth rates of nearly 8% in the five years before the crisis.  This was due to soaring growth in China and other Asian emerging markets, which resulted in high commodity prices that boosted growth rates in emerging markets in Latin America, Africa and the Middle East.  In this period, emerging markets were also maximizing the benefits provided by a number of developments, including the economic globalization that took off in the 1990s, the shift of manufacturing from developed economies to emerging markets and strong growth for domestic consumer spending.  For developed economies, the years before the financial crisis were characterized by steady, if unspectacular growth.  Already, the shift in economic power towards emerging markets was being felt throughout the developed world, as growth rates were already well below the levels achieved in previous decades.  Of course, much of the growth recorded in the years prior to the financial crisis was generated on the back of soaring debt levels, a factor that would come back to haunt developed economies during and after the financial crisis. 

As excess spending generated so much of the growth in the years before the financial crisis, it was inevitable that economic growth slowed significantly when this bubble burst, which it did spectacularly in 2008.  Since then, no region in the world has managed to return to the levels of growth recorded in the years before the crisis.  Many emerging markets did return to growth in the years immediately after the crisis, but this growth came to a screeching halt for many of the world’s leading emerging markets, including Brazil and Russia.  Even China is growing at a pace well below the growth rates in achieved in the years prior to the financial crisis.  Overall, these emerging market struggles are the result lower commodity demand in both developed and emerging economies, as well as the failure of these economies to boost domestic consumer spending in the years since the crisis. 

While emerging markets have struggled in recent years, most developed economies have found themselves stuck in a period of prolonged sluggish growth.  For example, while the United States has recorded higher rates of economic growth than most other developed economies since the crisis, its average rate of growth since 2010 is just 2.1%, well below the levels achieved in previous decades.  As for Europe, it has recorded an average rate of growth of just 1.1% since the crisis, and even with the ultra-low interest rates and weak currencies, Europe has not been able to grow by more than 2% in any recent year.  As such, it appears that the growth ceilings in developed economies have fallen in the wake of the crisis, limiting these economies’ ability to achieve higher rates of growth and to provide more growth opportunities for the rest of the global economy.

These lower growth ceilings in developed economies are one of the leading reasons for the troubles facing the global economy today as it limits the ability of nearly half of the world’s economy to generate growth.  There are many other reasons why growth rates have been so sluggish in the wake of the financial crisis and remain sluggish today.  For example, concerns about the impact of rising debt levels have reduced lending levels in many key economies, dragging down growth.  Another noteworthy factor is the idea that the benefits of globalization that created much of the growth in the 1990s and 2000s have run their course and no longer are providing a significant boost for the global economy.  Of course, demographics are also becoming a major drag on growth, as the working- and consuming-age populations in most of the world’s largest economies are growing much slower or are even in decline.  As a result of all of these factors, it is increasingly difficult to find a way for the global economy to grow at the levels it achieved before the financial crisis without major increases in productivity.  However, productivity levels have been disappointing in recent years, suggesting that these lower rates of growth are here to stay for the foreseeable future.