Rebooting the global economy

THE global economy is performing well below its potential on growth and on distribution because of three mismatches:

First, aggregate demand is deficient relative to aggregate supply. When looking at output gaps (the gap between actual output and potential output), as the International Monetary Fund has done, the picture is one of persistent underperformance of the global economy, seen to be in the range of 1.5 per cent to 2 per cent of GDP more than five years after the Great Recession.

Indeed, growth in emerging market economies has slowed as well, led by falling commodity prices and a slowdown in world trade. Some, namely those with fiscal space, have resorted to bolstering domestic demand, often favouring consumption over investment…