The publication of GDP data for the first half of 2011 for the world’s two largest economies, the US and China, provides a suitable moment to assess trends in economic growth since the international financial crisis commenced. Publication of 2nd quarter GDP data for the European Union (EU) and Eurozone later this month will alter details but is highly unlikely to alter the overall picture.
Ideally quarter by quarter GDP growth data would be available for all countries but unfortunately, until the beginning of 2011, China only produced figures for quarterly GDP calculated on a year on year basis compared to the same quarter for the previous year. Fortunately for clear analysis, the differences in growth rates between the main economies are sufficiently large that utilising annual data leaves no doubt as to fundamental trends.
The peak of pre-crisis US GDP was in the 4th quarter of 2007 - the peak for the EU and Japan was only one quarter later in the 1st quarter of 2008. Therefore the appropriate starting point for comparison, using annual data, is with the final pre-crisis year of 2007.
Data for GDP growth using a base year of 2007 is therefore shown in Figure 1. As 2011 is not yet over the working assumption has been made that the growth for this entire year is the same as the year on year change in the latest available quarter – the 2nd quarter 2011 for the US and China and 1st quarter 2011 for the EU. These projections will be modified as subsequent data is published.
Both the US and China are slowing – see Figure 2. Therefore, projecting for the whole of 2011 the latest available quarterly year on year change may therefore somewhat exaggerate growth for the year as a whole. However the difference between China on the one hand, and the US and the US and Eurozone on the other, is so large that no significant change in relative positions will result if the eventual 2011 growth rate for all three is altered by any reasonable margin.
Japan’s data will, of course, be highly depressed by the aftermath of the earthquake and tsunami. Therefore, apart from noting that the fall in Japan’s GDP during the financial crisis was greater not only than for China but also for the US and Eurozone, emphasis is not given here to quantitative comparisons for Japan.
Taking the above assumptions, then taking the entire period between 2007 and 2011:
- China’s GDP will have expanded by 44.5%.
- US GDP will have expanded by 0.8%.
- Eurozone GDP will have expanded by 0.4%.
Assuming some deceleration during the second half of 2011, the essential qualitative parameters of economic performance during the four years since the beginning of international financial crisis will therefore be that China’s economy has expanded by somewhat over 40% while the US and Eurozone economies have approximately not grown at all.
Such facts evidently have major implications both at the level of the objective development of the world economy and of analysis.
- In terms of development of the world economy, a 40%+ expansion of China’s economy during a four year period, simultaneously with essentially zero growth in the US and Eurozone, is sufficient to significantly alter the balance between the world’s major economies. To take an example of implications, in assessing when China’s GDP will overtake the US to become the largest in the world, the types of assumptions typically employed have been that the US economy will expand at around 2.5% a year and China’s at around 8.0% a year. However at present China is somewhat outperforming this figure, with an annual average growth rate of 9.6% in the last four years, while the US is substantially underperforming. Evidently, projecting US growth continuing at only an annualised 0.2%, as would be the case during the last four years from the data above, would be entirely unreasonable. But any lowering of the US annual growth rate below 2.5%, which appears a clear possibility, would bring forward the data when China’s GDP will overtake the US at market exchange rates from the 8-10 year period which is generally calculated to a 5-7 year period.
- The growth of China’s GDP by around forty per cent in the last four years, while the US has not grown at all, is already sufficient to show as incorrect those analyses, publicised in the Financial Times and elsewhere, which projected that the US would recover from the financial crisis more rapidly than China. For example Michael Pettis of Beijing University analysed that: ''the US would be the first major economy out of the crisis and China one of the last.' Attempts have been made to defend this and similar analyses by stating that the crisis is not yet over, therefore it is too early to pass judgement. In reality, with China’s economy expanding by 40% while the US has not grown at all, even if China’s growth were to slow it is already clear it has come through the financial crisis far more successfully than the US. Michael Pettis and those with similar views should therefore note that they were wrong, that those such such as this blog and others who analysed the opposite were correct, and begin to examine what errors in economic theory and analysis led to these wrong conclusions.
Growth of 40% in China over a four year period, compared to zero per cent in the US and Eurozone, is a quite sufficient test by facts to establish which analysis was right and which was wrong regarding the relative trajectories of China’s and the US economies during the international financial crisis.