Many people around the world enjoy increased access to health care, education and other vital services that would have been impossible without economic growth. But growth also creates problems. It can fuel inequality that threatens social cohesion and undermine the sustainability of the economy itself. The global economy faces major challenges, including rising for-longer interest rates, debt sustainability risks and the potential for new geopolitical tensions.
Historically, much of the global economy’s growth has been driven by increasing labor productivity. This has occurred through native population growth and immigration, as well as business investments in tangible capital (machines, factories, offices and stores) and intangible capital such as R&D. Increasing labor productivity has also been the result of technological advances, improving resource allocation and economies of scale, and decreasing discrimination and tariff barriers.
Other sources of economic growth include an expanding population and the growing demand for goods and services. During periods of sustained economic expansion, employment, industrial production and sales all increase. Economic output reaches its peak at some point in the expansion, after which growth slows. This decline is known as a recession.
The overall impact of economic growth on human welfare depends on how it is managed. For example, higher incomes raise people’s consumption of food and other commodities that improve their quality of life, while at the same time increasing the risk of obesity and heart disease. It’s important to take these issues into account in economic growth analysis.