(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: tmsnrt.rs/2PSujKz
* Chart 2: tmsnrt.rs/32kV6lc
By John Kemp
LONDON, Nov 5 (Reuters) - China has replaced the United States as the engine of the global economy, providing by far the largest contribution to growth in recent years and pulling along the world’s smaller economies in its train.
The Asian country accounted for 28% of all growth worldwide in the five years from 2013 to 2018, more than twice the share of the United States, according to the International Monetary Fund.
The Fund predicts China will account for a similar share of growth over the next five years between 2019 and 2024 (“World economic outlook”, IMF, October 2019).
China, India, Indonesia, Russia and Brazil collectively will account for more than half of all global growth through 2024, based on Fund projections (tmsnrt.rs/2PSujKz).
There is no scenario in which the global economy can achieve healthy growth unless these five economies, especially China, see their output and incomes rise strongly.
Resolving the economic conflict between the United States and China, or at least managing it better, will be critical if global growth is to accelerate again over the next few years.
Between the 1970s and the 1990s, it was common to characterise the United States as the locomotive of the world economy (“On the locomotive theory in international macroeconomics”, Bronfenbrenner, 1979).
U.S. fiscal and monetary policy usually played the decisive role in the development of the global economic cycle via trade and financial links to smaller economies.
The dominant role of the United States in the system was summed up in various versions of the phrase “when the U.S. sneezes, the world catches a cold”.
The United States is still important, and the Federal Reserve remains at the centre of global markets, but the U.S. economy is no longer large enough or growing fast enough to act as the sole locomotive for the world economic train.
China on its own, and the other major emerging markets collectively, are now more important drivers of the global economy (tmsnrt.rs/32kV6lc).
The traditional aphorism should probably be recast as “when China sneezes” or “when emerging markets sneeze”, the world catches a cold.
(China and the other major emerging markets are themselves increasingly interdependent since China is both a major importer of raw materials and supplier of manufactured products and outward investment.)
China’s cyclical slowdowns in 2014/15 and 2018/19 were major contributory factors in the worldwide economic slowdowns in those years and China will remain central to the global cycle over the next five years.
China’s cyclical position is especially important because its rapidly growing middle class is at the stage of economic development where demand for oil, motor vehicles, air travel, tourism and other industries is booming.
The economy is in the middle section of the S-curve where rising incomes drive fast growth in consumption of private motor vehicles and long-distance air transportation.
China’s cycle played a major part in the slump in oil prices in 2014/15 and again in 2018/19 by dampening oil consumption growth in those years.
Now the country, together with India, is playing a similar role in the global motor manufacturing slump, which has hurt automakers and is hitting the industry’s entire global value chain.
In turn, lower oil prices have hit revenues, government spending and business investment across much of the Middle East and other regions dependent on oil exports.
Oil’s cyclical slump is even hitting revenues, investment and employment in oil-producing regions of the United States such as west Texas.
Since early 2018, the United States has pursued a deliberate policy of attempting to hurt China’s economy in response to concerns about the shifting balance of economic power and unfair trade practices.
Tariffs and non-tariff barriers, including tougher restrictions on market access, investment, business ownership, security blacklists, sanctions and criminal prosecutions have been employed in a “whole-of-government” effort.
The narrow, publicly stated goal has been to force China to change its industrial policies, including subsidies, state-directed lending, intellectual property protection and market access.
The broader strategic aim has been to restrain the country’s growth and shore up the current U.S.-led global balance of power, at least until China’s political system becomes more plural and liberal.
Given China’s role as the global economic locomotive, economic warfare was bound to cause a broad slowdown in the world economy, which materialised in 2018/19.
There was simply no way to hurt China’s economy without the impact recoiling on the rest of the world, including on the United States, given China’s central role in global growth.
As a result, the Trump administration has been forced to choose between global growth and its trade and investment conflict with China (“Trump must choose between economy and trade war”, Reuters, Aug. 23).
For many U.S. policymakers, an economic slowdown has been a price worth paying to try to force changes in China’s economic policies and counter the country’s rapid economic rise.
But with U.S. presidential and congressional elections now just a year away, the focus has switched back to promoting growth, and the U.S. administration seems more anxious to reach a deal.
The United States and China appear keen to de-escalate their conflict, at least temporarily, to avert a recession and boost growth in 2020.
The deal currently being negotiated between China and the United States is likely to cover only a limited number of issues, including tariffs, intellectual property, and trade in agricultural and energy products.
The most serious disagreements are likely to remain unresolved, including market access, technology transfer, cyber-security, industrial subsidies, supply chains and the relative balance of military-economic power.
There is considerable uncertainty about whether the truce will prove stable and endure beyond the U.S. election cycle in 2020, especially if there are recurrent bouts of tension over unresolved issues.
For at least some U.S. policymakers, any truce is designed to buy more time to complete the partial delinking of the U.S. and Chinese economies and reorient global value chains away from China.
For some policymakers in both governments, renewed economic conflict is only a matter of time as the two countries engage in a long-term war of attrition.
Given China’s dominant role in global growth, however, it is hard to see how the United States can return to targeting the country’s economy without causing a renewed global slowdown.
More broadly, there is no plausible scenario in which the rest of the global economy experiences healthy growth over the next five years unless China grows strongly and U.S./China relations improve significantly.
The two countries need to coexist constructively. If they can’t, the outcome is likely to be an extended period of poor global growth.
- Global motor manufacturing slump hits oil demand (Reuters, Aug. 13)
- U.S. and China talk as manufacturers slump (Reuters, Aug. 1)
- Trade war rebounds on the United States (Reuters, July 9)
- U.S. may have overshot in China trade talks (Reuters, Feb. 18) (Editing by Dale Hudson)