NEW YORK (Reuters Breakingviews) - The world is headed for a year of smooth economic sailing. How smooth depends on U.S. President Donald Trump and Chinese leader Xi Jinping. The best thing that a duo who steer one-third of the planet’s GDP can do for growth is nothing.
Almost half of the 2.9 percent increase in global GDP forecast by the World Bank for 2018 comes from the United States and China. Investment and consumption are rising reasonably strongly in both, and central bank policy will remain generous. The United Kingdom, which is heading for a divorce from the European Union, has a more brittle economy but contributes just 2 percent of the world’s growth. The damage it can inflict will be limited.
Trump could cause harm by dismantling the global trading system of which the United States is a linchpin. The U.S. congressional system contains checks and balances when it comes to war or bad policy but the president has considerable freedom on trade. He has already raised tariffs on some Chinese aluminium products. Talks over NAFTA, or the North American Free Trade Agreement, the U.S. trade pact with Mexico and Canada, are tense. Only Congress can annul NAFTA. But if Trump pulls the plug, it will be as good as dead, to the detriment of jobs and productivity.
China could crater too, if Xi wills it. Activity will slow sharply if he curbs abundant credit growth, which is boosting house prices, investment, and imports. China’s home-made measure of broad credit, called “total social financing”, is still growing far faster than nominal GDP. True, debt – forecast by the International Monetary Fund to reach 300 percent of GDP by 2022 – is the biggest risk for China and at some point the piper must be paid. But a bigger threat in the near term is a clumsy, too-rapid deleveraging.
Xi is less liable to use his powers rashly than the U.S. president. Moderates, such as economic adviser Gary Cohn, have so far tempered Trump’s actions. They may not stick around. Were mid-term elections in 2018 to hand the Republican-controlled Congress to the Democrats, support may grow for retaliation against perceived trade slights.
Both leaders have good cause to want the synchronised expansion to continue. Besides being responsible for economic smooth sailing, Xi and Trump are also the biggest beneficiaries. Inaction, or impotence, are therefore the best things they can give to the world.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.