BY Fraser Tennant
A large-scale investment in infrastructure is the answer to the stumbling economic growth rates in many large economies, according to PwC’s new ‘Global Economy Watch’ report.
This stumbling growth or “sizable negative output gaps” identified by PwC provides a snapshot of the amount of spare capacity in an economy by estimating how close it operates to its potential level of output. Moreover, of the G7 group of countries, only the UK and Germany are anywhere near to closing the gap, while Italy is furthest adrift, reveals PwC.
“We don’t expect this to change soon, since our main scenario sees global growth of around 2.5 to 3 percent this year, the fifth year of below trend growth measured in market exchange rate terms," confirms Richard Boxshall, a senior economist at PwC. “The UK saw growth slow to a slightly-below-trend rate of 0.4 percent in the first three months of 2016, while the US grew at a lethargic rate of 0.1 percent quarter-on-quarter.
The answer, claims PwC, is to boost growth rates by investing in infrastructure – a strategy that the professional services firm claims would boost aggregate demand through increased construction activity and employment in the short-term and increase the potential supply capacity of an economy in the long-term.
To this end, PwC has set out four key investment principles for policymakers to utilise when deciding where to invest: (i) ensure it meets a need, identifying current and future needs, supplementing the base case analysis with a range of scenarios including optimistic and pessimistic cases; (ii) ensure consistency with other objectives, including social and environmental as well as economic goals.; (iii) ensure the numbers add up, as governments with a relatively low net debt position and healthy public finances (e.g., Germany and Canada) can boost aggregate demand/long-term supply capacity via infrastructure-led programmes; and (iv) ensure it will benefit the wider economy, factoring in both the long-term effects as well as the direct and indirect impacts.
“This type of investment is once again being touted as the key to unlock our low growth environment – but the effectiveness of this policy will ultimately depend on how many shovel-ready projects in different economies meet the principles we’ve outlined," concludes Mr Boxshall.
PwC’s Global Economy Watch is a monthly publication which examines the trends and issues that are affecting the global economy, detailing the latest economic projections for the world’s leading economies.
Report: Global Economy Watch