The IMF has slashed its forecast for global economic growth. Have memories of the recent past skewed its outlook? • Growth may never return to pre-crisis levels, says IMF

You’ll never have it so good again. That’s the message for the rich western economies from the International Monetary Fund (IMF) after yet another downgrade to its growth forecasts.

For a quarter of a century Japan’s once-booming economy has struggled; now Europe is heading in the same direction. The IMF thinks there is a 40% chance of a recession in the eurozone over the next year and a 30% risk of deflation.

Before the slump of 2008, the IMF boasted of how the global economy was enjoying its fastest period of sustained growth since the early 1970s. Now it talks openly of the possibility of secular stagnation: the notion that there has been a permanent downward shift in the potential growth rates of advanced economies.

Olivier Blanchard, the IMF’s economic counsellor, said there had been a structural slowdown in the west, which was why the global economy was unlikely to return to the pace of expansion seen before the financial crisis.

But the IMF also believes these lower levels of potential growth will be achievable only if interest rates are kept very low. Returning monetary policy to the settings in place before the collapse of Lehman Brothers in September 2008 – with a bank rate of about 5% in the UK – would lead to even lower levels of activity and high unemployment.

This is the scenario described by Alvin Hansen, the economist who coined the phrase “secular stagnation” in 1938. The date is important because despite a recovery from the great depression in the early 1930s, there was a relapse in 1937. Pessimism about the future was as strong then as it is now, yet during the next three decades the global economy expanded at rates not seen before – or since.

It is possible, therefore, that the experience of the recent past skews forecasts of the future. When the world economy was humming along, the IMF expected the boom to be everlasting. Now it can see nothing other than a continuation of the sluggish performance of recent years.

Some slowdown in the pace of growth in the west is inevitable given declining growth rates. But population is only one of the factors that lead to stronger growth. Others include labour market participation, the skill of the workforce and technological progress.

It is not immediately obvious why countries should have become dumber or less creative over the past decade, so there may be other reasons – the overhang of debt or a malfunctioning financial sector – that explain the slowdown. Three in four UK economists polled by the Centre for Macroeconomics are sceptical of the secular stagnation thesis.

There are a couple of other points worth mentioning. The first is whether secular stagnation – assuming it exists – actually matters. If, as some studies show, there is no link between growth and happiness once gross domestic product hits a certain level, why be so obsessed about achieving rates of expansion that threaten the environment?

In truth, most of the happiness studies relate to a period when real incomes were rising. It remains to be seen how people respond to a lost decade of falling living standards. There is little sense of wellbeing levels rising, perhaps because the fruits of growth have been so unevenly distributed.

The second issue is that policymakers think something structural has happened to the global economy over the past decade, whether or not they think it amounts to secular stagnation. That means that interest rates – even when they start rising – will remain low by historic standards.

As Blanchard noted yesterday, there is a risk that the prospect of permanently low borrowing costs will encourage financial markets to take bigger and bigger risks. We know where that road leads.