But such a sharp decline in potential growth typically implies a powerful brake, in the form of an external shock or major internal adjustments. Under normal circumstances, an economy s potential growth rate adjusts naturally and gradually, as structural change progresses.

And the GDP in Africa is not making much progress.

The unemployment rate remains about two percentage points higher than what most economists consider consistent with a full recovery, and the labor force participation rate is hovering near historic lows. The economy is still operating far below its potential GDP is about 6 below what the economy is capable of producing at full capacity without higher inflation.

China s Untapped Growth Potential

For example, US real per capita GDP grew by a factor of 1.87 that is, nearly doubled in size from 1961 to 1986, but by a factor of only 1.58 from 1978 to 2003. Such differences in 25 year growth rates are important if US GDP grows by a factor of 1.87 over the next 25 years, annual GDP will be 3.6 trillion ( 10,000 per person) higher than if it grows by a factor of only 1.58.

In the last two years, credit grew almost twice as fast as GDP, and total social financing grew even faster. Yet GDP growth slowed considerably from an annual average of 10.2 in 2002 2011 suggesting that China may be moving closer to a medium to low speed growth path.

The aim of the concept of potential as opposed to actual GDP is to take into account that, like an engine, an economy often operates below or above potential. In a demand driven recession, actual output falls below potential, which results in a rise in unemployment.

The gap between actual and potential GDP is thus a gauge of an economy s spare capacity. The distinction is also useful for policy purposes weak potential growth cannot be addressed by demand side initiatives supply side measures are needed.

GDP growth of 4.6 per cent remained modest, particularly since it had not fed into job creation.

When the first and second arrows lift actual growth above potential growth, monetary expansion will no longer be able to produce substantial GDP or employment gains. That is when the third arrow, which aims to boost Japan s potential growth through structural change (including increased private investment, technological innovation, improved trade links, and reformed corporate tax policy), will become far more important.

But there is no reason why trade should grow faster than GDP forever. Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods.

Some will object that there is little point in creating GDP linked bonds in advanced countries, because there is little uncertainty about GDP growth there. However, even in the relative calm of the post war era, long term real GDP growth in advanced countries has been rather variable.

As a result of a deep and persistent deficiency in aggregate demand, the US economy has been operating far below its potential output level. Real GDP fell by 8 relative to its noninflationary potential in 2008 2009, and has remained about 8 below its previous growth path ever since.

One might question why GDP in China, where per capita income recently surpassed 7,000, is set to grow so much more slowly than Japan s did from 1956 to 1970, when the Japanese economy, with per capita income starting from about 7,000, averaged 9.7 annual growth. The answer lies in potential growth.

A study last year showed a direct correlation between the growth of mobile phone use and subsequent GDP increases across Africa.

But, while the CN 4 trillion stimulus package propped up growth temporarily, return on investment was deteriorating, because potential growth was already lower than actual growth. As a result, credit demand was relatively weak in many cases, commercial banks had to persuade enterprises to accept loans, with a large proportion of the credit ultimately devoted to chasing assets in the capital market.

The US is adjusting structurally and generating real (inflation adjusted) GDP growth (though well below its potential annual rate of 3 3.5 ). The tradable sector is expanding and is not dependent on leverage to generate aggregate demand.

Even the reduced global forecast of 3.4 GDP growth for this year is likely to prove excessively optimistic. Before the crisis, world trade grew at 6 8 annually well faster than GDP.

That was in the early 2000s when India was going gung ho about GDP growth as the means forward looking at China with its stellar growths of eight, nine, 10 percent and wondering, why can we do the same?

Argentina s long term GDP growth has been disappointing. In fact, real GDP per capita declined 15 over the 25 year period from 1965 to 1990 a period that saw some Asian economies quintuple in size.

By focusing exclusively on foreigners and domestic elites for investment, Afghanistan is missing out on the vast potential of micro entrepreneurs and small businesses to contribute to steady GDP growth. Achieving long overdue peace and stability will be impossible without them.

The success of the East Asian model was predicated on a sharp increase in the investment rate. Beginning with Japan, every rapidly growing East Asian economy sustained investment rates in the range of 38 40 of GDP over its rapid growth phase.

Hardest to understand, though, is why India is underperforming so much relative to its potential. Indeed, annual GDP growth has fallen by five percentage points since 2010.

Global potential production of heroin is estimated to have more than doubled, from approximately 210 tonnes in 1984 to 502 in 1995.

In its most recent WEO, the IMF forecasts global GDP to grow by only 3.3 in 2012, and by 3.6 in 2013. Moreover, the downgrading of growth prospects is remarkably widespread.

We recognize the potential of South South cooperation in promoting economic growth and development.

These will be created when the volume of operations is low, but potential for portfolio growth is high.

For these reasons, I take a more moderate view, predicting that China s average potential GDP growth will fall to 5 6 by 2030. This expectation is based on a conditional convergence framework that relies on data generated by China s unique growth experience, as well as those of other economies, over the last three decades.

Similarly, GDP growth began to pick up in the spring of 2014, running above the rate of the preceding three years. Partly as a result of income growth, the US budget deficit last year was lower than forecast, at about 2.8 of GDP.

These changes do not directly induce economic growth, but they increase the economy s potential or long run income. Growth itself occurs as the economy begins to converge to this higher level of long run income.

Gordon also points to the recent slowdown in real (inflation adjusted) GDP growth. According to official US statistics, real GDP per worker grew at an average annual rate of 2.3 from 1891 to 1972, but by only 1.5 since then.

But the growth formula that long underpinned South Korea s success a form of state guided capitalism that focuses on export led manufacturing is no longer working for many South Koreans. GDP has nearly tripled over the past 20 years, but, with real wages rising at less than half this rate, growth has become decoupled from the fate of ordinary citizens.

A back of the envelope calculation suffices to show that, unless the government is prepared to tolerate a further increase in the investment rate, achieving a GDP growth target of 7.5 implies a significant fall in the growth rate of investment. To compensate for the negative impact on GDP growth, and with export growth constrained by weak global demand, consumption must rise even more sharply, which is hard to imagine.

In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in GDP growth. But the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has meant a much higher unemployment rate for a much longer period.

Now, while I was at Microsoft, the annual revenues of that company grew larger than the GDP of the Republic of Ghana.

47. The growth of the world economy over the last 35 years has been enormous, measured only by GDP, which as we know falls far short of measuring wealth in its entirety.

According to preliminary reports, annual investment growth in 2012 reached roughly 14 significantly higher than the GDP growth rate, which accelerated in the fourth quarter as a result of a strong rebound in investment in real estate and infrastructure. In 2013, it can be expected that, barring major disruptions, strong investment growth will push China s GDP more than 8 higher year on year.

If the latecomer s advantage implied by the income gap between the four NIEs and the US enabled the NIEs to realize average annual GDP growth rates of 7.6 9.2 for 20 years, China s annual growth potential should be a similar 8 for the 2008 2028 period. To realize its potential growth as a latecomer, China needs, above all, to deepen its market oriented reforms, address various structural problems, and develop its economy according to its comparative advantages.

Second, persistent weakness in consumption and GDP growth puts the US economy on a much weaker growth trajectory than that which is built into the government s long term budget estimates. The Congressional Budget Office is assuming 3.4 average growth in real GDP over the 2013 to 2016 period.

My extrapolation of the IMF model shows that Western countries can boost their long term GDP growth significantly by increasing their levels of capital investment over a three year period. An annual stimulus equivalent to just 0.3 of GDP yields a return in the US of 0.8 in economic growth at its peak in 2013, and 0.4 in Europe.

Under the circumstance that is lack of more sustainable investment growth to boost economic growth potential, current fiscal policy driven growth will be unsustainable, Economist Barclays indicated in a research report.

As Europe continues down the road of digital transformation, the possibilities for growth are immediate and significant. The continent is already the world's largest economic bloc, with a GDP of more than 14 trillion ( 15.2 trillion) in 2014.

And the region s problem is not too much domestic savings, but too little. Latin American countries save 18 of GDP, on average, compared to 30 in fast growing East Asia.

The economy therefore limped along year after year, with real GDP in the final quarter of each year less than 2 higher than it had been a year earlier. Employment grew more slowly than the population, and annual real wage increases averaged only about 1 .

So here, too, the logic points to a vicious circle Slower growth leads to artificial remedies and further erosion of long term growth potential.