What drives economic growth, and what stops it
GDP is the value of everything an economy produces in a year. In the short run it rises and falls with spending: when households, companies and governments spend more, firms produce more and hire. Over the long run, how fast it can grow depends on how many people work and how productive they are. This page explains both, and where the major economies stand.
The terms you need
Each definition is followed by a real example from the latest data.
- GDP (gross domestic product)
- The value of all goods and services produced in an economy over a period, usually a quarter or a year. Real GDP removes the effect of inflation, so its growth shows whether the economy is actually producing more.
- Recession
- A broad fall in economic activity lasting more than a few months, with output, jobs and incomes all falling. A common rule of thumb is two quarters in a row of falling real GDP.
- Potential growth
- How fast an economy can grow over time without pushing up inflation, set by growth in the number of workers and in how much each one produces.
- Output gap
- The difference between what an economy is producing and what it could produce without pushing up inflation. A positive gap means it is running hot; a negative gap means spare capacity and usually higher unemployment.
- Unemployment rate
- The share of people in the workforce who have no job but are looking for one. People not looking for work, such as students and retirees, are not counted.
- Purchasing managers’ index (PMI)
- A monthly survey that asks purchasing managers at private companies whether output, orders, prices and hiring rose or fell compared with the month before. Readings above 50 mean activity is growing; below 50, shrinking. A first “flash” estimate comes out before the month ends.
- Nominal GDP growth
- How fast an economy grows measured in money, before removing inflation: roughly real growth plus inflation. It is the growth rate that matters for debt, because debt and taxes are in money too.
Spending sets the pace, capacity sets the limit
One person’s spending is another’s income, so changes in spending spread through the economy.
- 1 →Spending changesHouseholds buy more or less, companies invest or wait, governments spend or cut, and foreigners buy more or fewer exports.
- 2 →Firms respondWhen orders rise, firms produce more and hire. When they fall, firms cut output, then hours, then jobs.
- 3 →Incomes followMore jobs and hours mean more wages, which are spent again. A fall works the same way in reverse. This knock-on effect is why slowdowns can feed on themselves.
- 4 →Capacity bindsIf spending grows faster than the economy can produce, firms run out of workers and machines, and prices rise instead of output.
- 5The central bank leans against itIt raises rates when the economy runs too hot and cuts when it runs cold, to keep growth close to what the economy can sustain.
In the US, household consumption is about two-thirds of GDP, so shoppers matter most. Imports are subtracted because they are produced elsewhere, even if they are bought at home.
An ageing population means fewer new workers, so growth has to come from productivity: better machines, skills and ideas. That is why Japan’s potential growth is estimated at only about half a percent a year.
GDP is published weeks after each quarter ends and revised for years. Business surveys such as PMIs, weekly jobless claims and order books show a turn sooner, which is why markets watch them closely.
When oil prices jump, oil-importing countries send more of their income to producers abroad, leaving less to spend at home. That is why the 2026 oil shock is slowing Europe and Japan. See Mechanic 03.
Europe and the UK usually call two quarters in a row of falling GDP a recession. In the US, a committee at the National Bureau of Economic Research decides, looking at jobs, incomes and output as well as GDP.
Growth is holding up in the US, slowing in Europe
The IMF expects India to grow fastest this year among the countries we follow, at 7.0%, and France slowest, at 0.4%. Growth is slowing from last year in India, China, Brazil, Japan and France. In China, United States, Germany, United Kingdom, Italy, Japan and France, growth this year is also below its 2015–19 average.
| Country | 2015–19average | 2025 | 2026IMF estimate | 2027IMF forecast | Unemployment2026, % |
|---|---|---|---|---|---|
| United States | 2.6% | 2.3% | 2.3% | 2.3% | 4.2% |
| Germany | 1.9% | 0.2% | 1.3% | 1.1% | 4.0% |
| France | 1.5% | 0.9% | 0.4% | 0.7% | 8.4% |
| Italy | 1.0% | 0.5% | 0.8% | 0.6% | 5.6% |
| United Kingdom | 2.1% | 1.2% | 1.3% | 1.2% | 5.3% |
| Japan | 0.9% | 1.2% | 0.7% | 0.7% | 2.5% |
| China | 6.7% | 5.0% | 4.5% | 4.0% | 5.1% |
| India | 6.7% | 7.8% | 7.0% | 7.0% | 5.0% |
| Singapore | 3.1% | 5.0% | 5.0% | 3.0% | 2.1% |
| Brazil | −0.5% | 2.3% | 2.2% | 1.9% | 6.2% |
Real GDP growth, % a year. Source: IMF World Economic Outlook (via the IMF DataMapper). Select a country for its full profile.
What stands out today
- The US economy grew at a 2.2% annual pace in the second quarter and unemployment is little changed at 4.2%: the oil shock has not yet tipped it into a slowdown.
- In the euro area, business surveys are weakening. Activity grew at its slowest pace in four months in October, and France’s private sector is shrinking again.
Why it matters
This is the dilemma of an oil shock. Higher energy prices raise inflation and cut growth at the same time. Central banks meeting this week have to judge which matters more: raise rates to fight inflation, or hold to avoid deepening the slowdown.
This mechanic in the news
Recent stories that show this mechanism at work, newest first.
All news →Sources and notes
- US GDP: Bureau of Economic Analysis, real GDP, change from the previous quarter at an annual rate (via FRED). Most other countries report the change from the previous quarter without annualising, which gives numbers about a quarter the size.
- US unemployment: Bureau of Labor Statistics (via FRED). Euro area PMI: HCOB flash PMI, compiled by S&P Global, 23 October 2026.
- Country growth and unemployment: IMF World Economic Outlook (via the IMF DataMapper); this year and next are IMF estimates and forecasts. Japan’s potential growth: Bank of Japan estimates.