(Euronews)
The global economy showed remarkable resilience in 2023, as the United States defied expectations and managed to avoid a recession. India, Vietnam and Japan also achieved impressive economic performance given the circumstances. But while these countries have good reason to be optimistic about 2024, China will most likely be the single largest contributor to global GDP growth this year.
This may come as a surprise to many, given the wave of increasingly gloomy forecasts for the Chinese economy. Of course, China may not reach its full potential in 2024. Only by pursuing meaningful reforms and reaffirming economic opening (the two pillars of the country’s remarkably successful growth model over the past four decades) can it regain lost momentum .
A country’s relative contribution to global GDP growth depends on both its weight in the world economy and its relative economic growth. In purchasing power parity (PPP) terms, China’s share of the world economy was 18.8% in 2023, compared to America’s 15.4%. With the International Monetary Fund predicting that the Chinese economy will grow by 4.6% in 2024 – more than double the growth projected for the US – China, despite its continued slowdown, is likely to account for a much larger share greater share of global GDP growth than the US. will.
After a quarter century of stagnation, Japan appears to be experiencing an economic revival. Finally escaping the deflation trap that trapped its economy for more than three decades, the country is projected to grow by 1% in 2024. However, its contribution to global growth will be more limited than China’s or the US, due to its smaller weight in the world economy and slower growth.
Meanwhile, the outlook for the United Kingdom and the European Union looks bleak. Barring an unexpected and unlikely resolution to the war in Ukraine, the best-case scenario for Europe’s economy is that it does not hamper global growth.
India, which is expected to grow by 6.3% this year, is expected to be the only major economy to grow faster than China. Geopolitical developments have been favorable for India, enabling it to buy cheap Russian oil, avoid measures that would be impossible if undertaken by China, and assert itself on the world stage. These favorable developments, along with the domestic reforms pursued by Prime Minister Narendra Modi’s government, have also led to an increase in foreign direct investment. But because India’s share of the world economy is less than half of China’s, its contribution to global growth will be smaller than China’s as well.
Similarly, developing countries such as Vietnam, Tanzania, Guyana, Gambia, Ethiopia, Djibouti, Cote d’Ivoire and Burkina Faso are projected to grow rapidly in 2024. But they all make up a very small part of the world economy.
Although China is expected to remain the largest contributor to global GDP growth, it may underperform its growth potential – which I estimate to be around 5.1% – in 2024. Furthermore, the spread The positive spillover from Chinese growth to other economies will also be more limited if the country’s import growth does not return to pre-pandemic levels.
China’s main medium-term economic challenge is its shrinking workforce. Even if productivity growth remains constant, this demographic shift would put downward pressure on GDP growth. Given the current downturn in China’s property sector, slower-than-expected household spending and private sector investment, the chances of another real estate-driven economic boom appear slim.
But the biggest threat facing the Chinese economy today is falling into the debt deflation trap. Because deflation increases the real value of existing debts, banks may become increasingly reluctant to lend to businesses and local governments. As indebted households and businesses reduce their spending, the toxic combination of debt and deflation can cause a vicious cycle of lower investment and reduced demand.
The reluctance of Chinese monetary authorities to adopt a more expansionary monetary policy is unhelpful. While the People’s Bank of China (PBOC) and the country’s banking regulator have set key performance indicators on lending rates to stimulate lending, state-owned commercial banks often meet these targets by lending to non-performing state-owned enterprises (SOEs) that do not require funding. as urgent as many non-state enterprises.
In fact, SOEs usually get loans at lower interest rates than the rates of banks’ wealth management products. Instead of investing these funds in productive projects, they often redeposit them for a higher interest rate, allowing banks to lend to the same SOEs. While this process inflates banks’ reported figures for loans and deposits, creating the appearance of effective monetary policy, such practices do little to boost output, employment, and tax revenues.
To avoid a deflation-debt spiral, Chinese policymakers urgently need to inject more liquidity into the economy. But for the lending channel to work effectively, China needs to reform its state-owned banks to ensure that financial institutions focus on profitability and lend to the most productive firms, rather than creating artificial cash flows. Unfortunately, China is unlikely to undertake these critical reforms anytime soon.
There is an alternative policy package in the short term. Chinese policymakers may combine an aggressive fiscal policy with the monetization of government debt. This would require a three-step plan. First, fiscal policy should focus on building low-income housing, improving public infrastructure, and paying off outstanding debts of local and national government agencies to private sector firms. Second, these expenditures can be financed through the issuance of new long-term government bonds. Finally, the PBOC must buy these bonds and hold them until maturity, or at least until the economy returns to its potential growth rate.
With a more expansionary monetary policy in the short term and structural policy reforms in the medium term, the Chinese economy could approach its full growth potential, which would also help boost global economic growth.
