The US stops China’s assault on the throne of the world economy

United States China World Economy

The coronavirus crisis seemed to have shortened the timelines for China to become the world’s largest economy, taking the position away from the US. In the second quarter of this year, there has been a change in the trend in the face-to-face between the two giants. It is the first time since 1990 that the American economy has increased the gap with respect to the Asian dragon and experts are confident that it will remain that way for the next few quarters.

Today a new macro data has confirmed the slowdown in the Chinese economy. While the rest of the world has not yet reached the peak of growth, the Asian giant is stepping on the brakes. China’s industrial production grew 6.4% year-on-year in July, below analysts’ forecasts (who expected 7.8%), and compared to the 8.3% advance registered the previous month, the National Statistics Office (ONE) reported today. Regardless of the base effect in its comparison with last year, when the Chinese economy began to stretch after the stoppage caused by the start of the coronavirus pandemic, the figure shows the recovery of industrial production, although it is also about the fifth consecutive month of slowdown. China’s GDP increased 7.9% in the second quarter, compared to 18% in the previous period.

In the race to become the world’s largest economy, the US is offering resistance to abandon its hegemonic placeUS GDP grew 12.2% in the second quarter, in year-on-year terms. Since 1990, China has always been growing faster than the North American economy. With the impact of the pandemic, it seemed that this dynamic was going to intensify, shortening the deadlines for the great sorpasso.

The two economies are reflecting the response that each nation has had to counteract the effects of the pandemic. The coronavirus circulated before in China and was the first country to apply tough restrictions. Chinese GDP fell 6.7% in the first quarter of 2020 compared to the previous year, while the US recorded slight growth with the world holding its breath so that the covid will not sweep away the western economies.

It seemed that the coronavirus was going to accelerate the overtaking

China’s aggressive response restored the country’s growth at a faster rate than that of the United States, which suffered less severe restrictions. The US economy took longer to straighten out than China’s, but in the medium term, it invested far more resources in the recovery. A combination of vaccines, massive fiscal stimulus, and near-zero interest rates pushed the United States ahead of China in GDP growth. 

With consumption as an engine of growth in the post-pandemic era, the United States has an advantage. The stimulus packages have caused excess savings in families of 2.6 trillion dollars, seven times more than the resources generated by the Chinese authorities, according to Moody’s Analytics. Family savings should be the most decisive growth factor for both powers in the coming quarters.

Moody’s uses this hypothesis to forecast that US GDP growth will outpace China’s for the next five consecutive quarters. Capital Economics and Oxford Economics see a similar trend, although they believe it will last for three quarters.

In any case, it represents a meager victory for the US and only delays the inevitable. With a Chinese population four times as large and after decades of investment aimed at modernizing and industrializing the economy, China’s destiny is to become the world’s leading economy by GDP. Beijing began opening up its economy to the world in the 1970s, since then it has greatly reduced the gap with the US. According to Oxford Economics, China will be the world’s largest economy in 2030 and Moody’s estimates that the crossover will occur in 2038.

Since 1970, China’s gap with the US has not stopped closing

The recent growth reversal somewhat delays China’s economic upward potential. Beijing is also facing major issues that could push the date further, economists say, including a crackdown on the private sector, sharp increases in public debt and aging economies. the population.

China’s 15- to 59-year-old workforce peaked in 2014 and has been shrinking since, including a 0.5% decline in 2020, according to Capital Economics, which expects China’s GDP growth to slow to around 2% by 2030. roughly the same as the expected long-term growth rate for the US.

Chinese leader Xi Jinping “appears to be working to regain China’s place in history before the demographic decline occurs,” Arvind Subramanian, an economist at the Peterson Institute for International Economics, told The Wall Street Journal.

The United States also has many long-term challenges to growth, including a highly divided political system, rising healthcare bills, and slow productivity growth.

In the early hours of this Monday, several references have been made about China, the second-largest economy on the planet, which has remained below the expectations of the experts. “Looking ahead, we see few positive factors for the [‘Asian giant’s] economy, instead we see more risk factors,” says Iris Pang, chief economist for the region at ING Economics. “Strict social distancing measures have affected the nearby ports of Ningbo and Shanghai. This will negatively affect import and export activity in the Shanghai area. (…) Strict social distancing measures also limit the flows of people around mainland China, limiting leisure travel and national spending during summer vacations, “says this expert.

In this way, ING Economics foresees that China’s gross domestic product (GDP) will grow by 4.5% year-on-year in this third quarter and 5% year-on-year in the last quarter of 2021. Likewise, Oxford Economics anticipates a slowdown in the economic growth of the Asian country in the current quarter. “Even with a recovery in the fourth quarter, the current setback is large enough to justify a downward revision of our forecasts,” said Tommy Wu, an analyst at the firm.