One important point that gets missed in the debate over the likely shape of the post-virus recovery is that different economies are already rebounding at different speeds. According to the official data, at least, China is leading the way. This raises three questions: can we trust the official data, is the recovery in China sustainable and will it benefit the rest of the world?
The first question is often asked of China’s GDP data – and with good reason. We use our proprietary China Activity Proxy (or CAP) to track shifts in the economy. It suggests that between 2012 and 2019 the official real GDP data were not only implausibly stable but that they also tended to overstate the pace of growth. (For more, see here.) However, the picture painted this year looks more tenable. The official data show that output fell sharply in Q1, when China’s coronavirus lockdown was in place, and then rebounded as the economy reopened in Q2. And while the CAP suggests that the fall in output – and subsequent rebound – was a bit larger than the official data, this does not change the broader point that China’s economy has fared well compared to others. (See Chart 1.)
Chart 1: Real GDP (% y/y, CE forecast for Q3)
The question of whether China’s recovery is sustainable is more knotty, in part because timeframes matter. The policy response by Beijing has so far followed the usual playbook – leaning on state-owned banks to lend, instructing state-owned firms to invest and boosting infrastructure spending. As a result, the recovery has been credit-fuelled and investment-led and will ultimately exacerbate the structural problems at the heart of China’s economy. This strengthens our conviction that growth will slow in the long-term. But these issues will crystalise over years and decades not months and quarters. China is likely to be among the world’s best-performing economies in 2020-21.
This brings us to the question of whether China’s rebound will benefit the rest of the global economy. It will, of course, mechanically lift world GDP growth over the next year or so. But the key for other countries is the extent to which the recovery in China translates into greater demand for imported products.
The investment-led nature of China’s rebound has sucked in imports of raw materials used most intensively in construction and infrastructure, such as iron ore and copper. This has given a boost to countries that produce these commodities, including Chile, Peru and South Africa, but these are too small to move the dial at a global level. And China’s rebound has failed to give a similar lift to energy prices and oil producers.
More fundamentally, despite the boost it has given to import demand for some commodities, the recovery in China has come alongside a rebound in its current account surplus. This reflects the fact that demand for everything from PPE to webcams has boosted its exports. As a result, China is set to run a surplus of 2.5% of GDP this year. And while a surplus of that size would still be much lower as a share of China’s GDP than it was a decade or so ago, China now accounts for a much larger share of the world economy. As things stand, China’s current account surplus is likely to be equivalent to 0.4% of global GDP this year – a level only previously surpassed by China in 2006-2008 and Saudi Arabia in 1974. (See Chart 2.)
Chart 2: China Current Account Balance (Share of Global GDP %)
All of this means that, while China’s rebound has been impressive, it has not boosted growth elsewhere. This could have consequences beyond just the next couple of years, most obviously by accelerating the pushback against globalisation that had already started before the pandemic began. We’ll have more to say about that in a webinar later this week (all welcome, register here).