As the recovery gains traction, U.S. economic growth is expected to average about 3.0% per year, suggests a new report from TD Economics.
However, looking further out, potential GDP growth is likely to decline to around 2%, which could have major impacts on fiscal policy, investment returns, and income inequality, TD warns.
In the report, TD says that the U.S. economy is likely to grow by approximately 3% per year over the next several years; which is roughly in line with the average pace of growth over the last century. However, once its excess capacity has been eliminated, and the pace of economic growth becomes more closely tied to labour force growth and productivity, GDP growth is likely to slow, it says.
It suggests that, by 2018, labour force growth is likely to slow to about 0.5% a year, and productivity is likely to slow to 1.5%, “implying overall potential real GDP growth of around 2.0%.”
This new slower rate of economic growth “will have wide reaching implications”, TD says, noting that it implies lower interest rates, slower growth in government revenues, corporate profits, and household incomes. This, in turn, will impact monetary and fiscal policy, and investment returns, and may worsen income inequality, it says.
TD says that slower growth implies a lower rate of profit growth, and therefore lower investment returns generally. “Corporate profits are already at an all-time high relative to U.S. national income. Maintaining this high share would represent a break with history. In all likelihood, as the labour market tightens, profit margins are likely to narrow,” it says. “Over the longer term, profits are likely to grow in line with nominal GDP, that is to say, slower than many investors have become accustomed to.”
Additionally, slower revenue growth will constrain governments’ ability to invest in programs that would reverse inequality, it notes.
“The good news is that there are ways of lifting the potential rate of growth,” TD says. Most promising, it suggests, is immigration reform, which it says could raise both potential labour force growth and productivity. Increasing immigration could boost the labour force, provide an influx of younger workers in particular, and, it says “higher rates of innovation and entrepreneurship among immigrants are likely to raise … productivity.”
“All told, the trend is not written in stone, but given slowing demographics and the reduction in investment over the last decade, a slower pace of potential economic growth is likely in store,” TD concludes. “Policy changes could go a long way to remedying this and will increase in urgency as time passes.”