But if successfully executed, these objectives are mutually reinforcing and will lay the foundation for a more sustainable and vibrant First World economy. Moderation in growth Why is China growing more slowly? As China reaches a more mature stage of development, it is simply unrealistic to expect it to grow at the same rate as before. China is confronted with the reality of supply-side constraints that every economy eventually runs into. •  According to UN projections, China’s working-age population (aged 15–59), is projected to shrink by 0.6% each year over the next 15 years. Slower growth does not mean anaemic growth. China may no longer grow at 8–10%, but it is well positioned to grow by 6 to 6.5% for the next five years. With the right mix of structural reforms, there is substantial scope for China to achieve faster catch-up in productivity and income levels. •  China’s per capita GDP is modest by international standards and its labour productivity remains well below the frontier. •  The less developed regions in China still have scope to grow at rates that are higher than the national average, and this process of internal convergence is itself an important source of future productivity growth. The large size of the Chinese economy means that, at even more moderate rates of growth, the incremental demand from China will be quite substantial in absolute terms – and this is what matters for the global economy.
So what could account for the recent poor productivity performance? One possibility is that the weakness of measured productivity growth may exaggerate the true extent of underlying weakness. Let me explain. An encouraging aspect of the recent recession is that although unemployment increased, it rose by far less than we might have feared given the depth of the recession. The recent data on employment and unemployment are worrying in that context, with unemployment edging up over the summer, after having previously fallen by over 50,000 from its peak in early 2010. If this weakening in the labour market continues that could materially change the relationship between output and employment. But to date, companies appeared to have held onto a greater proportion of their labour force than in past recessions. My own experience of speaking to businesses at the depth of the recession is that this was driven by a desire to retain valuable skills and experience. Many companies had learned from past experience how difficult it is to re-employ skilled workers once let go. But a consequence of this labour hoarding is that the amount of output produced per worker fell very sharply, in many cases partly because working hours were cut back. And although there has been some rebound since then, the level of labour productivity has still not recovered to its previous level. This greater retention of labour suggests that firms may be sitting on a substantial degree of spare capacity.