The US and China in the World Economy

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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
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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

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Top ten countries by population
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World economic history is a tale of divergence
Before 1980s, lacklustre economic performance in
Asias two giants
Source Angus Maddison, The world economy
historical statistics, 2003 See Mark Thirlwell,
http//www.lowyinstitute.org
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World economic history is a tale of divergence
Industrial Revolution and 1st Age of
Globalisation produced growing gap between
advanced world and majority of Asias population
Source Angus Maddison, The world economy
historical statistics, 2003 See Mark Thirlwell,
http//www.lowyinstitute.org
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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
Source Angus Maddison, The world economy
historical statistics, 2003 and IMF World
Economic Outlook database (September 2006)
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Measurement mattersTwo views of the 12 largest
economies in 2005
Source IMF World Economic Outlook April 2006
database See Mark Thirlwell, http//www.lowyinsti
tute.org
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Global Imbalances
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• What are the macroeconomic imbalances?
• What are the sources of current account
  imbalances?

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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

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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

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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

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The Global Financial Crisis
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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

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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

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Changes in Global Share Prices as at 10/7/08
Per cent
Since recent peak

• United States
• Dow Jones- SP 500- NASDAQEuro area-
  STOXXUnited Kingdom- FTSEJapan-
  TOPIXCanada- TSE 300Australia- ASX
  200China- China A- China B
• MSCI Emerging AsiaMSCI Latin America
• MSCI Eastern Europe
• MSCI World

-30 -33 -35 -40 -32 -45 -32 -34 -64 -68 -4
6 -37 -47 -32
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What will happen in China?
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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

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Energy and Climate Issues
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Source Energy Information Administration /
International Energy Outlook 2007 - Reference Case
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Source Energy Information Administration /
International Energy Outlook 2007 - Reference Case
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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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