By Jens Erik Gould From The Financialist

It’s been seven years since the global financial crisis began, and growth has yet to return to pre-crisis levels. It may not do so for the foreseeable future, either. In developed markets, growth is expected to average 1.6 percent between 2015 and 2020, compared with 2.25 percent before the crisis, according to the International Monetary Fund. Emerging markets are forecast to grow 5.2 percent, down from 6.5 percent pre-crisis. This poses an important question: Is the persistently sluggish growth around the world simply cyclical, a long hangover from the financial crisis? Or is it more structural, an extension of long-term trends that were already in motion before the Great Recession?

There are two potential causes for the downward growth trend. The first suggests that the global economy has an aggregate demand shortage, and that spending on investment hasn’t been enough to bring the economy back to full capacity. An alternative explanation focuses on supply-side deterioration. Around the world, populations are getting older, and workforces are shrinking. Companies, in turn, are planning for slower demand for goods and services in the long term. Labor and capital, the two key inputs for a more productive global economy, are both taking a hit.

Not surprisingly, as befits a complex question such as this, the answer is that there is truth in both points of view. That said, researchers in Credit Suisse’s Private Banking and Wealth Management division think longer-term supply issues are being given short shrift by policymakers more focused on shorter-term, demand-related responses. Their prescription? An increased focus on labor reforms and technological investment to ensure more efficient use of both labor and capital in the future. The emphasis on technology is particularly important since increased labor force participation can only partially offset the demographic problems, Credit Suisse says.

Policymakers have focused most of their actions on the demand side of the problem. Central banks in the U.S., Japan and European Union have undertaken massive quantitative easing programs since the crisis in hopes of boosting demand. They’ve also increased fiscal stimulus by increasing spending on infrastructure projects and other measures. Not all demand drivers are policy-based, of course. When oil prices fell last year, the added savings for consumers and businesses bolstered demand in the U.S., Europe, and some emerging markets. And a weaker euro has helped pry open consumers’ wallets in Europe.

The supply-related aspects of the problem are stickier. They have therefore received less attention from policymakers, largely because structural problems require long-term solutions that can be difficult and painful to implement, and consequently have the tendency of alienating voters come election season.

Among the supply-related factors weighing down global growth potential, demographics is key, according to Credit Suisse. Many countries in the developed world—and even many in the developing world—are faced with declining population growth, which means fewer working-age people.

In Japan, Germany and Southern Europe, the size of the working-age population has peaked and is now declining. Growth in this portion of the population is also starting to slow down in many parts of Asia, Latin America and Eastern Europe. Africa (with the exception of South Africa) and some parts of Southeast Asia are the only places on earth where youth is ascendant. Aging populations are a drag on growth because of reduced labor supply. Additionally, retirees who no longer earn a paycheck usually spend less money, while governments are simultaneously faced with rising pension costs, which reduces money available for investment elsewhere. Finally, says Credit Suisse, companies in countries with aging populations tend to reduce long-term investments, which hurts GDP growth.

One key way countries can minimize the impact of a greying citizenry is to pass structural reforms that encourage greater workforce participation. Nowhere is this more important than in the Eurozone, where output is expected to settle in at a mere 1 percent per year over the next decade—compared to an average of 2 percent in the 1990s. Lawmakers have already taken some steps to address their demographic dilemma. After pension reforms in some European countries, the share of workers over 60 in the labor force has grown. With European female participation rates lower than in other developed countries, the Eurozone could also benefit from measures that incentivize more women to work, according to Credit Suisse economist Giovanni Zanni, who wrote a report entitled “Productive Thinking.”

Of course, even the smartest of reforms cannot completely push back the demographic tide. And if a labor force isn’t growing, it has to become more efficient if GDP growth is to improve. Zanni emphasizes the importance of total factor productivity, which assesses how efficiently an economy makes use of traditional inputs such as labor and capital. By this measure, Europe is floundering: Total factor productivity has fallen to 75 percent of that of the U.S. in 2015 after peaking above 85 percent in the 1990s. The reason? The region has failed to invest sufficiently in technologies that could make production more efficient. The obvious solution would be to increase such outlays, and doing so would go a long way toward boosting growth. If Europe were once again 85 percent as productive as the U.S., says Credit Suisse, GDP growth would return to 2 percent. It may not sound like much, but two is twice as good as one.

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