Global growth faces another dark shadow if economic data for the world's major economies for the second quarter of 2019 are any indication.

While the United States enjoyed the fastest economic recovery and strongest momentum after the global financial crisis, its GDP growth rate continues to decline since the second quarter of 2018 - its year-on-year growth rate dropped from 3.2 percent to 2.3 percent.

The United Kingdom's second quarter growth rate was only 1.2 percent, a record five-year low. Even the growth rate of Europe's "star", Germany, fell to an all-time low of 0.4 percent in the second quarter. This continued decline in the growth rate of major economies confirms the "secular stagnation" of the world economy, even before it could recover fully from the 2008 financial crisis.

What are the reasons behind this long-lasting crisis? One explanation economists offer is that the world economy has sunk into "secular stagnation". The hypothesis is not new. US economist Alvin Hansen had first proposed it in 1939 to explain the Great Depression of the world economy in the 1930s. In 2013, former US Treasury secretary Lawrence Summers re-examined the theory and brought it to international attention.

An economy that is in a state of "secular stagnation" has three main characteristics. First, the economy grows at a low rate for a long time and is unable to make full use of its potential production capacity.

Second, with the decline of GDP growth, total factor productivity, even labor productivity, sees a sustained decline.

Finally, the willingness to save exceeds the willingness to invest, and the natural rate of interest tends to decline or even turn negative.

After the financial crisis, many economists attributed the global slowdown to lower growth in total factor productivity or labor productivity. In reality, however, both are endogenous variables determined by economic activities.

But attributing the decline in the economic growth rate to factors like these won't help us find the real reason. Given that capital and labor remained the same and there was no sudden decline in technology stocks, why did total factor productivity and labor productivity suddenly experience a sustained drop in growth, compared with that in the period before the financial crisis?

According to the secular stagnation theory, there can be two reasons for long-term stagnation: insufficient effective demand and mediocre technological progress. The former includes factors like the aging of a given population, decline of the population growth rate, decrease of investment demand and rising global savings rates.

More importantly, the supply and demand factors that lead to secular stagnation are often intertwined. In terms of technological progress, the third industrial revolution (driven by computing and the internet) has contributed far less to productivity growth than the second one (characterized by electricity, and internal combustion engines, and indoor running water), said US economist John S. Gordon.

The contribution made by personal computers and internet technology to improve productivity is not as great as people think. The marginal contribution by previous industrial revolutions to technological progress has been gradually exhausted; and there have been no revolutionary inventions such as electricity and the internal combustion engine.

The decline in marginal return on investment results in companies' low willingness to invest even when interest rates are close to zero.

How should China deal with the secular stagnation of global economic growth?

Historical data shows a correlation between China's total factor productivity and that of the world's leading technology countries. Before the financial crisis, China's economic growth benefited from the world's loose technological exchange environment.

However, the environment for international scientific and technological cooperation may deteriorate. This is not good for China's scientific and technological development and economic growth recovery. The country's economic development must thus rely more on an endogenous driving force.

To maintain stable economic performance during a secular global stagnation, China should gradually reduce its dependence on developed economies.

Now that there have been diminishing returns from demand stimulus policies, the Chinese government has abandoned strong stimulus policies and is focusing on supply-side structural reform instead. Only through comprehensive economic restructuring can we withstand the pressure from secular stagnation.

But supply-side structural reform and technological innovation cannot be accomplished overnight. Supply-side structural reform will pay off in the long run and may even have a negative impact on the economy in the short term. Only by transforming its economy can China enter a new period and move closer to becoming a high-income country.

All aspects of China's policies should be structurally adjusted to encourage mid-and long-term innovation. Economic policies should set the stage for technological innovation and patented inventions and provide better policy support for fundamental research.

The author is a researcher at the National Academy of Development and Strategy at Renmin University of China.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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