Transcript The US and China in the World Economy

The US and China in the World
Economy
Warwick J McKibbin
CAMA, Australian National University
& The Lowy Institute for International Policy, Sydney
& The Brookings Institution, Washington DC
Presentation prepared for George Washington conference on U.S.-China Trade Relations, 20 October 2008
Outline
• The Big Picture – China Catch up
• Recent History
– Global Imbalances
• The Global Financial Crisis
– Causes & consequences
– Will China face a Recession?
• Energy and Climate Issues
• Conclusion
Top ten countries by population
1950
2005
Pop’n
(bns)
Cumul.
%
2050
Pop’n
(bns)
Cumul.
%
Pop’n
(bns)
Cumul.
%
1
China
0.56
22.0
China
1.32
20.4
India
1.59
17.5
2
India
0.36
36.2
India
1.10
37.4
China
1.39
32.9
3
USA
0.16
42.5
USA
0.30
42.0
USA
0.40
37.2
4
Russia
0.10
46.6
Indon
0.22
45.5
Pak
0.31
40.6
5
Japan
0.08
49.9
Brazil
0.19
48.4
Indon
0.29
43.7
6
Indon
0.08
53.0
Pak
0.16
50.8
Ngeria
0.26
46.6
7
Ger
0.07
55.7
Russia
0.14
53.0
Brazil
0.25
49.4
8
Brazil
0.05
57.9
Bangla
0.14
55.2
Bangla
0.24
52.0
9
UK
0.05
59.9
Ngeria
0.13
57.3
Congo
0.18
54.0
10
Italy
0.05
61.7
Japan
0.13
59.2
Ethpia
0.17
55.9
World economic history is a tale of divergence
GDP per capita
1990 dollars, PPP basis
20,000
China
India
US
16,000
Before 1980s,
lacklustre economic
performance in Asia’s
two giants
12,000
8,000
4,000
0
1600 1700 1820 1870 1913 1950 1970 1980
Source: Angus Maddison, The world economy: historical statistics, 2003
See Mark Thirlwell, http://www.lowyinstitute.org
World economic history is a tale of divergence
GDP per capita
1990 dollars, PPP basis
20,000
China
India
US
16,000
Industrial Revolution
and 1st Age of
Globalisation
produced growing
gap between
advanced world and
majority of Asia’s
population
12,000
8,000
4,000
0
1600 1700 1820 1870 1913 1950 1970 1980
Source: Angus Maddison, The world economy: historical statistics, 2003
See Mark Thirlwell, http://www.lowyinstitute.org
Now, the start of the Great Convergence?
Between 1980 and
2007, China is
expected to close
GDP per capita gap
with US from 6% to
19% of US levels
GDP per capita
% of US level, PPP basis
20
China
India
15
10
5
0
1950
1960
1970
1980
1990
2000
Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic
Outlook database (September 2006)
Measurement matters:
Two views of the 12 largest economies in 2005
Top 12 economies by GDP, PPP
Top 12 economies by GDP, US$
% of world GDP
% of world GDP
25
30
25
20
20
15
15
10
10
5
5
US
Ja
pa
er n
m
an
y
Ch
in
a
U
Fr K
an
ce
Ita
Ca l y
na
da
Sp
ai
n
Ko
re
a
Br
az
il
In
di
a
G
US
Source: IMF World Economic Outlook April 2006 database
See Mark Thirlwell, http://www.lowyinstitute.org
Ch
in
Ja a
pa
n
Ind
Ge
i
rm a
an
y
U
Fr K
an
ce
Ita
ly
Br
az
Ru il
ss
Ca i a
na
da
Sp
a in
0
0
Global Imbalances
• What are the macroeconomic imbalances?
• What are the sources of current account
imbalances?
Two Aspects of Global
Imbalances during this century
• Global Savings in excess of global investment
which shows up as low long term real interest
rates
Two Aspects of Global
Imbalances
• National savings and investment imbalances
which show up as current account imbalances
between countries
– Countries with national savings greater than
national investment run current account
surpluses
– Countries with national investment greater
than national savings run current account
deficits
Current Accounts 1995-2008
(%GDP)
25
20
15
NIEs
Europe
ASEAN5
Middle East
China
USA
$bil
10
5
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-5
-10
Source IMF World Economic Outlook October 2008
Current Accounts 1995-2008
($US)
600
400
200
0
$bil
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-200
-400
-600
-800
-1000
Source IMF World Economic Outlook October
2008
NIEs
Europe
ASEAN5
Middle East
China
USA
Not a Single cause
• US current account deficit is an excess of US
investment relative to US saving
• Pull
– US fiscal deficits
– Decline in household saving
– Strong productivity growth
• Push
– Decline in Asian investment rates (except
China)
– Rising corporate and household saving in
China
– Oil revenue recycling by Oil Exporters
1
Main drivers behind the decline in current account balance in the
United States
Boom collapses
US dot com inv estment boom
0
-100
US fiscal deficit and
-200
public dissav ing, low
US$ billion ...
-300
personal sav ing rates
-400
-500
-600
Asian financial crisis and
-700
-800
loss of inv estor confidence
Japanese inv estment slump
-900
1991
1993
1995
1997
1999
Source: OECD Economic Outlook No. 76, December 2004
2001
2003
2005
US Fiscal Position 1995-2008
(%GDP)
2
1
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$bil
-1
-2
USA
-3
-4
-5
-6
Source IMF World Economic Outlook October 2008
The Global Financial Crisis
The Global Financial Crisis
• A number of shocks leading up to it between
2002 and 2007
– Inflation surge from loose monetary policies in
the US and pegging economies
– Large shifts in relative prices due to strong
global growth particularly in China
– Housing bubble growing in the US and UK
– Global savings and investment imbalances
Policy Rates
%
%
Market expectations
6
6
5
5
4
4
Euro area
3
3
US
2
2
1
1
Japan
0
-1
l
2001
l
l
2003
l
0
l
2005
l
l
2007
l
2009
-1
Commodity Prices in $US
(Index = 100 in 2003M1)
500
450
400
350
300
250
200
150
100
50
20
03
20 M1
03
20 M4
0
20 3M7
03
M
20 10
04
20 M1
04
20 M4
04
20 M7
04
M
20 10
05
20 M1
05
20 M4
0
20 5M7
05
M
20 10
06
20 M1
06
M
20 4
06
20 M7
06
M
20 10
07
20 M1
07
20 M4
0
20 7M7
07
M
20 10
08
20 M1
08
M
20 4
08
M
7
0
Source: IMF World Economic Outlook Database October
2008
Energy
Food
Agricultural Raw Materials
Metals
Beverages
International Consumer Prices
Year-ended percentage change
%
%
G7*
4
4
CPI
2
2
Core
%
6
%
6
China
3
3
0
0
%
%
Other East Asia*
6
6
3
3
0
2000
2004
2008
* Weighted by GDP at PPP exchange rates,
excludes Indonesia and Japan
0
The Global Financial Crisis
• Contraction of the US Housing market
• Massive de-leveraging by financial institutions
with MBS exposure
• Credit markets freeze due to unknown counter
party risk
• Governments slow to react to loss of confidence
• Stock market slump and housing price decline
reduces consumption and investment
• Recession looming in the industrial world
US – Housing Indicators
M
Housing starts
M
Annualised
2
2
1
1
’000
Stock of unsold new houses
’000
500
500
350
350
200
200
1988 1992 1996 2000 2004 2008
3-month LIBOR to Swap Spread
Bps
Bps
250
250
US$
200
200
150
150
UK£
100
100
Euro
50
50
A$
0
l
Sep
l
Dec
2007
l
Mar
l
Jun
l
Sep
2008
Dec
0
MSCI World Share Price Indices
Local currencies, 2 January 2006 = 100
Index
Index
130
130
Non-financials
120
120
110
110
100
100
90
90
Total
80
80
Financials
70
60
70
l
M
l
J
S
2006
l
l
D
l
M
l
J
S
2007
l
l
D
l
M
l
J S
2008
l
D
60
Changes in Global Share Prices as at 10/7/08
Per cent
Since recent
peak
United States
- Dow Jones
- S&P 500
- NASDAQ
Euro area
- STOXX
United Kingdom
- FTSE
Japan
- TOPIX
Canada
- TSE 300
Australia
- ASX 200
China
- China A
- China B
MSCI Emerging Asia
MSCI Latin America
MSCI Eastern Europe
MSCI World
-30
-33
-35
-40
-32
-45
-32
-34
-64
-68
-46
-37
-47
-32
United States – Business Conditions
ISM survey
Index
Manufacturing
Index
Non-manufacturing
65
65
50
50
35
35
2002
2005
Source: Thomson Reuters
2008
2002
2005
2008
United States – Labour Market
’000
Change in payrolls employment
250
250
0
0
-250
%
’000
-250
%
Unemployment rate
6
6
5
5
4
4
3
3
2002
2005
2008
United States – Consumption and Income
Constant prices, percentage change
%
Consumption
Disposable income
%
Year-ended
5
5
0
0
Monthly
-5
2002
2005
Source: Thomson Reuters
2008
2002
2005
-5
2008
What will happen in China?
China – Exports to Major Economies*
Volumes, year-ended percentage change
%
%
40
40
Euro area
US
20
20
0
0
Japan
-20
2000
* Smoothed
2002
2004
2006
2008
-20
China – Industrial Production
Year-ended percentage change
%
Total
Steel*
%
25
25
0
0
%
Concrete*
Energy*
%
25
25
0
0
-25
1996
2000
2004
2008
* Thick lines use 13-term Henderson trend
2000
2004
-25
2008
China
• Slowing in the economy apparent but our
modeling suggest that China can withstand the
global shock because of lack of financial shock
domestically
– Trade effects negative
– Capital flow effects positive
• On balance a slow down but a switch into
domestic demand away from export led growth
Energy and Climate Issues
Share of Global Energy Consumption
2007
25%
US
20%
15%
10%
China
Russia
5%
Japan
India
Germany
0%
Source: BP Statistical Review of World Energy 2008
1
Canada
France
Korea
UK
Contribution to Growth in Global Energy Consumption
2000 to 2007
60%
50%
China
40%
30%
20%
10%
Asia Pacific
Europe & Eurasia Middle East
India
0%
1
Source: BP Statistical Review of World Energy 2008 and author's calculation
S & C America North America
Figure 5: Global Primary Energy Consumption, 1990 and 2030
250.0
200.0
150.0
MMT
2004
2030
100.0
50.0
0.0
United States
OECD Europe
Japan
Australia/New
Zealand
Other OECD
China
Source: Energy Information Administration / International Energy
Outlook 2007 - Reference Case
India
Other NonOECD
Figure 7: Global Carbon Dioxide Emissions from Fossil Fuels 1990 and 2030
14,000
12,000
10,000
MMT
8,000
2004
2030
6,000
4,000
2,000
0
United States
OECD Europe
Japan
Australia/New
Zealand
Other OECD
China
Source: Energy Information Administration / International Energy
Outlook 2007 - Reference Case
India
Other NonOECD
Figure 1: Comparison of Projections of Energy Consumption, China
(Quadrillion(1015) Btu)
200
Reference Case
(EIA 2002)
160
High Economic
Growth Case
(EIA 2002)
Projection
History
120
Low Economic
Growth Case
(EIA 2002)
80
Reference Case
(EIA 2007)
40
High Economic
Growth Case
(EIA 2007)
0
1990
1995
2000
2005
2010
2015
2020
2025
2030
Note: The base years for projections reported in EIA 2002 and 2007 are 1999 and 2004, respectively.
Source: Energy Information Administration / International Energy Outlook 2002 and 2007
Low Economic
Growth Case
(EIA 2007)
Conclusion
• The United States and China are key players in
the global economy for the rest of this century
• The process of economic convergence and high
growth in China will likely continue and is the key
issue for the world economy
– Trade and capital flows
– Energy use and carbon emissions
– Relative prices of commodities
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