An end to the US-China trade war is the world’s best hope for long-term pandemic recovery
- As global growth slows, the US must increase government spending and taxation, while China can pick up the remaining slack through heavier investment spending
- Most importantly, though, a return to strong US-China bilateral trade would do much to restore economic confidence
With global growth expected to lose momentum this year as many of the world’s central banks wind down monetary super-stimulus and step up their fight against inflation, the US and China will need to find new resources to sustain confidence.
Headline payrolls only rose by 199,000 in December but overall net gains were boosted by upward revisions of a further 141,000 jobs to the previous two months.
With the headline jobless rate dropping to 3.9 per cent, from 4.2 per cent in November, the US economy is heading back to full strength, leaving the Fed on track to raise interest rates in March against a backdrop of headline inflation running too high for comfort.
The Fed’s median expectation is for US gross domestic product growth to rise by 4 per cent this year, slowing thereafter to 2.2 per cent in 2023 and 2 per cent in 2024. The US economy ought to be doing a better job longer term and might risk dragging on global growth at a time when the recovery needs extra zest.
If the global economy stands any chance of hitting 4.9 per cent growth, which the International Monetary Fund has forecast for this year, then China needs to take up the slack.
Even though the market consensus is for China’s 2022 growth rate to slow to 5.5 per cent from a likely 8 per cent for 2021, with the right policies in place, 6 per cent GDP growth might still be possible this year.
The bias towards easier monetary policy should help, but Beijing will need to rely on more deficit spending on public investment to carry the extra burden. Added investment spending will mean more pressure on government bonds and higher yields, but it will be good news for global investors seeking to diversify into higher fixed-income returns in China.
But as the world restocks and finally catches up with the backlog of unfilled orders, the boost to global trade will wane and require a fresh boost. World trade growth had already slowed to around 6 per cent year on year by last October and more deceleration seems likely. This is where the US and China finding a resolution to the trade war could be vital.
If economic gains no longer sustain US-China relations, what will?
Once stronger trade flows are restored, the world stands a better chance of stability and sustainable recovery in the future.
David Brown is the chief executive of New View Economics