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The rate at which an economy’s sustainable productive capacity can expand.
Save conceptPotential growth concerns the expansion of the amount an economy can sustainably produce. It is different from observing that shops or factories sold more in a particular year. An economy can recover by using idle workers and equipment more fully even if its underlying capacity changes little.
More labour and productive equipment can raise capacity. Better skills, methods and technology can also produce more output from the same resources. The St. Louis Fed distinguishes a recovery toward existing capacity from longer-term growth in capacity itself. Potential capacity is an estimate, so different assessments need not agree on its level or pace.
Suppose an economy can sustainably produce 100 units of -adjusted output this year and 103 next year. Its potential growth is 3 divided by 100, or 3%. If actual output rises from 95 to 100 units, observed growth is approximately 5.26%. The larger observed increase partly reflects use of previously idle capacity; it does not imply potential growth of 5.26%.
Actual growth records the change in output achieved over a period. Potential growth estimates the expansion in sustainable capacity. A one-year forecast can be below potential because demand is weak, or above it during a recovery. Neither a policy target nor a minister’s aspiration is automatically a reliable estimate of potential growth.
Thai central-bank official sees conditional path back to 3% growth