# I. Introduction

The global economy headed into the COVID-19 pandemic and the Russian invasion of Ukraine after a decade of slowing growth. The pandemic-induced global recession of 2020 further deepened this slowdown and Russia’s invasion of Ukraine in February 2022 has already left additional scars. These adverse shocks have reduced not just actual global output growth but have also dampened potential growth—the rate of increase of potential output, defined as the level of output an economy can sustain at full capacity utilization and full employment. Potential growth is a critical determinant of a wide range of macroeconomic and development outcomes. Sound fiscal and monetary policy decision about stimulus or austerity cannot be taken without being grounded in a firm understanding of potential growth.

Potential growth is of fundamental importance to short- and long-run macroeconomic analysis and policy but it is not directly observable. In an extensive literature, three main methods of estimating potential output growth have been employed, each of which has its advantages and disadvantages. Thus, measures of potential growth based on production function estimates make it possible to study the contributions of the fundamental drivers of growth—namely, the growth of the factors of production and technical progress—but involve assumptions that may be viewed as restrictive. A second method uses economic analysts’ long-term (five-year-ahead) output growth forecasts, which may be assumed to incorporate their judgments. The third method obtains measures of potential growth from statistical filters of actual growth data; it may be best at ensuring consistency between estimates of potential growth and output gaps, on the one hand, and indicators of domestic demand pressures, on the other.

This study introduces the most comprehensive international database yet for the nine most commonly used measures of potential growth, based on these three methods, for the largest available sample of countries over the period 1981-2021. In addition, this study addresses the following questions. First, how has potential growth evolved in recent decades? Second, how have recessions and other adverse developments affected potential growth? Finally, through which channels have such developments affected potential growth?

The study makes several contributions to the literature. First, it introduces the first comprehensive database of the nine most commonly used measures of potential growth for the largest available country sample—of up to 173 economies (37 advanced economies and 136 emerging market and developing economies [EMDEs])—over 1981-2021. These measures comprise one based on the production function approach; five based on the application of univariate filters (Hodrick-Prescott, Baxter-King, Christiano-Fitzgerald, Butterworth, and Unobserved Components filters); one based on a multivariate Kalman filter; and two based on long-term growth forecasts. Previous studies have limited themselves to a single method of measuring potential growth, such as the production function approach (OECD 2014), or multivariate filters (ADB 2016; IMF 2015). This study builds on earlier work published before the pandemic that utilized several measures of potential growth (Kilic Celik, Kose, and Ohnsorge 2020; World Bank 2018).

Second, the study documents a broad-based and long-standing slowdown in potential 2