François Villeroy de Galhau: Secular stagnation and growth measurement Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Secular stagnation and growth measurement conference, organized by the Bank of France, Paris, 16 January 2017. * * * Accompanying slides Ladies and Gentlemen [slide 1], I am very pleased to welcome you all to Paris, for this conference on “secular stagnation and growth measurement”. We should always be cautious when using expressions as categorical as “secular stagnation”, and which describe the long term: Alvin Hansen, who coined it in 1938 with his famous “full recovery or stagnation”, lived long enough – until 1975 – to see thirty years of almost full recovery, instead of stagnation. Nevertheless, this risk, popularized again recently by Larry Summers, is a matter of concern for central bankers. Why? Because a persistent slowdown in trend output growth could make the economy more vulnerable to shocks that push the natural interest rate below the effective lower bound. Whether secular or lasting for many years, very slow growth and inflation also challenge the efficacy of conventional monetary policy tools. They can affect the sustainability of public and private debt. And beyond central banking concerns, they can also alter the functioning of our social models. Let me just clarify that I will not speak about monetary policy today, as we are in our “silent period” before the Governing Council meeting.
Allow me to say simply that some of the more recent comments about a “come back of inflation", which would allegedly put the Governing Council under strain, seem greatly exaggerated. So, where do we stand? The slowdown in per capita growth in advanced economies can actually be traced back to the 1970s [slide 2]. It worsened in several stages, the latest starting in the mid2000s, after the ICT revolution and before the Great Recession. The issue is that this prolonged slowdown raises questions about future potential growth, largely due to uncertainty about productivity trends. To assess the risks, I would like to elaborate on the three hypotheses that form the basis for today’s conference [slide 3]: first, are we simply underestimating growth? Second, is the slowdown a demand phenomenon? Third, is it a persistent phenomenon due to a slowdown in the pace of innovation? 1. Are we underestimating growth? New technologies usually lead to a mismeasurement of output. National accounts indeed have a hard time taking into account improvements in product quality and product entry or exit. As a result, they tend to overestimate inflation and underestimate output. For instance, there is currently an issue with IT hardware, as output of these products is inadequately recognised, even in the US. But the growing share of digital computing technologies in economic activity raises new specific challenges, both on a conceptual and practical level [slide 4]. Let me take the example of travel services.