US-China Watch

With the world in flux as never before, macroeconomic insight and analysis is always at risk of chasing a moving target. That is especially the case when it comes to the US-China conflict, driven by the oft unpredictable crosscurrents between the world’s two largest economies and their ambitious geostrategic aspirations. Through the combination of blogging and tracking the rapidly shifting news flow, the weekly updates below will attempt to keep you abreast of the latest developments on the US-China watch.

New Engines of Global Growth

While China remains the major growth engine in a $105 trillion (USD) world economy, I argued last week that this engine is now operating at a slower speed than we have been accustomed to. China’s peak impetus to the world economy was concentrated in 2010 to 2019 when it contributed fully 32% to the cumulative increase in global GDP. Over the past three years, from 2021-23, China’s global growth contribution slowed to 23%; moreover, based on the International Monetary Fund’s latest World Economic Outlook, that contribution is predicted to slow further to 21% by 2027-29, accounting for China’s smallest share of global growth since the 1990s.

With the Chinese engine now operating with less power, I posed the obvious follow-up question: Which nation, if any, might fill the void? The short answer is India. In the face of the slowdown in Chinese economic growth over the past fifteen years, growth in the Indian economy has surged—especially in recent years. Over 2022-23, Indian real GDP growth averaged 7.4%, over three percentage faster than China’s 4.1% pace over the same period. Moreover, and potentially of even greater significance, the IMF expects Indian economic growth to average 6.5% over the six years ending  in 2029, well in excess of China’s 3.8% pace now expected for 2024-29.

As the chart below indicates, largely because of this growth disparity—India surging while China is slowing—India has played a major role in filling the void left by China as a major engine of global growth. The Indian economy accounted for 14.5% of global growth in 2021-23, fully three percentage points more than its contribution in 2010-19; moreover, a steady progression of this growth contribution is expected over the next six years—rising to 16.7% over 2024-26 and hitting 18.7% over 2027-29. If this forecast is correct, India’s contribution to global growth over these final three years of the medium-term forecast horizon (2027-29) will be only slightly below China’s  21% share.

As was the case in the math of China’s global growth contribution discussed last week, the impetus to India as a new major engine of global growth reflects both surging real economic growth in the Indian economy as well as a steady increase in its PPP-based share of world GDP. On this latter count, while India’s PPP share has been increasing sharply in recent years—from 5.8% in 2010 to 7.6% in 2023—and is expected to increase considerably further to 9.2% by 2029, its scale remains well below that of China. As can be seen in the second chart below, on a PPP basis, the scale of the Chinese economy is expected to remain nearly double that of India’s through 2029.   Even so, and this is a technical point, the expected flattening of China’s PPP share stands in contrast to the steady increases expected in India’s share—a distinction that imparts greater relative leverage to the math of India’s global growth contribution in the years immediately ahead.

Yes, this is only a forecast. My calculations of relative strengths and weaknesses in the sources of global growth have been drawn from the forecasting framework of the World Economic Outlook, long developed by the research staff of the International Monetary Fund. Some readers have criticized this approach, claiming that the IMF forecasts are of poor quality and shouldn’t be used as the basis for an assessment of prospective sources of global growth.

I beg to disagree. I ran a global forecast team at Morgan Stanley for 30 years. I am very familiar with the trials and tribulations of putting together a global forecast. The tools and techniques I used at Morgan Stanley drew heavily on those I helped develop at the Federal Reserve Board where I worked as a senior forecaster in the 1970s. Generally-accepted practices in both cases—the IMF as well as the Fed—rely on a combination of judgment at the country-desk (IMF) or sector (Fed) level together with a large-scale, state-of-the-art econometric model used for consistency checks at the country, regional, and global levels. Various studies, a couple of which can be found here and here, have shown that the IMF WEO forecasts perform adequately over time—better than most of the alternatives (of which there are actually very few at the global level) but certainly prone to errors at some key turning points/ crises. Most importantly, the studies show there is no systematic bias to under-predict or over-predict actual growth outcomes.

I am not arguing that the IMF has the perfect lens into the future. I am, instead, using the IMF forecasts in my sources-of-growth analysis as the best approximation for the consensus views of an imperfect—and yes, often unpredictable—future.  As such, my recent comments on China, Hong Kong, and now India are aimed at exploring the ramifications of that consensus trajectory, That then allows me to draw out analytical implications about the macro outlook without getting hung up on who has the “best” view of the future.

Certainly, the forecasting community and the broader punditry have had a good deal to say about the India-China comparison in recent years. Look no further than the April 22, 2024 issue of The Economist, which contained the first installment of a six-chapter Special Report, “The India Express,” which focuses on the very issue that I am addressing—whether India can become a new engine of global growth. Notwithstanding the comprehensive and compelling analysis of this report, the conclusion is very Chinese-like its major takeaway—that it will require a new reform agenda for India to deliver as a new global growth engine. The Economist’s laundry list of requisite Indian reforms—unifying fragmented markets, a new focus on innovation, and a consolidation and strengthening of federal and state governance—are applicable to most large developing economies, including China.

While the jury is out on whether China or India is best suited to deliver, the IMF’s latest forecast certainly gives the nod to India over the next six years. In conjunction with China’s multiplicity of structural headwinds —especially those arising from demography, productivity, debt, and property—I would concur with this baseline assessment and, by inference, with its implications for the shifting growth dynamic of the world economy.

Two other points bear noting in this assessment of the shifting sources of global growth:

One, the US doesn’t live up to its press in providing support to the widely held view that it is now the strongest economy in the world, the most powerful global growth engine. The IMF forecast has the US economy contributing a steady 10% of global growth over the next six years—less than half the 23% contribution of China and well below India’s 17% share of global growth from 2024 to 2029. In fact, no other country or region—the EU, ASEAN, Latin America, or Japan—comes close to India and China as engines of global growth.

Two, it’s not as if the world is able to make a seamless transition from one growth engine (China) to another (India). As the big Chinese engine slows and the smaller Indian engine picks up steam, the combined impetus of this now two-engine world is slowing. As a result, overall world GDP growth is expected to ease to a 3.1% trajectory over the next five years, down from the 4.4% surge of 2021-23 and well below the longer-term trend of around 3.5%. Consequently, along with the emergence of a new Indian growth engine comes a renewed period of global vulnerability that could well lead to serious trouble in the years ahead.

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