Home Global China How U.S. Will Outgrow China in 2022

How U.S. Will Outgrow China in 2022

How U.S. Will Outgrow China in 2022
U.S. and China trade war. Source: Zignox.com

MEXICO CITY — We have been living momentous times, and the end of 2021 is no exception. In a blink of an eye, we move from inflation-driven paranoia into Omicron-induced recessionary fear. It will take a while before the dust settles, but once it does, I believe 2022 could be a very good year for the U.S. economy.

In fact, I think that, for the first time since the late 1970s, U.S. gross domestic product growth will outpace China’s GDP expansion.

It´s a gutsy call, but it is what the likes of Cathie Wood have in mind, even if they are not necessarily in the business of forecasting. The International Monetary Fund is, and although still sees the Chinese economy expanding at a higher rate than the U.S. next year, the difference (5.6% vs. 5.2%) is minimal. In fact, this is the kind of gap that can easily tilt the outcome in the opposite direction. All it takes is a few events on the upside in the U.S., on the downside in China or a combination of both. And indeed, conditions across the Pacific rim appear to be moving in the required directions.

Let´s start with COVID-19. China´s vaccination rate at 69% of its population is higher than the 58% for the U.S., but the average effectiveness of the jab is lower. The “zero policy” adopted by China probably implies a higher activity trade off than in the U.S., where consumer sentiment plays a larger role. In any case, assuming a comparatively better performance for the U.S. or China on this front is highly speculative. It is better to adopt the prevalent view of COVID-19 becoming endemic, with waves of contagion becoming increasingly smaller. If this is the case, other factors will gain relevance at explaining economic performance during 2022. Let’s focus on those factors.

On the U.S. side, fiscal policy will remain extraordinarily stimulative. 2022 will see the initial impacts of deploying an infrastructure plan worth USD1 trillion. The upside is that the Senate approves the USD1.75 trillion “Build Back Better” bill, thus leading total extra fiscal support to a whopping 13% of GDP.

Yet this is not the only driver of U.S. growth. In contrast to the Global Financial Crisis (GFC), households are not overindebted. The personal saving rate at 7.3% of disposable income in October remains high, albeit not at the extreme values registered during the pandemic (33.8% in April 2020). Meanwhile, although non-farm payrolls at 124.9 million remain below pre-pandemic levels (129.4 in February 2020), the labor market is much tighter than what these figures suggests, as the participation rate is also lower (61.8% in November this year vs. 66.3% in February 2020). In sum, there´s plenty of job offers and a lot of money to spend. Should Americans take these opportunities once COVID-19 fears recede, the sky´s the limit: the Atlanta Fed´s nowcast currently stands at 9.7% for 4Q21.

China meanwhile faces a very different situation than in 2009, when it borrowed its way out of the GFC and indeed, performed much better than the U.S. The problem is that debt kept piling up and has reached staggering levels: the IIF calculates China´s total debt at 329% of its GDP as of 2Q21. The financial sector, along with non-financial corporates account for 42% of total debt and this is where the current focus of attention is. The difficulties of several large real estate developers – a sector whose weight in total GDP is often estimated at 30% – and its potential impact on the banking sector creates the risk of a financial crisis.

Yet the fact that most Chinese debt is internal suggests that Chinese authorities could opt for a “controlled explosion”, such as what Japan implemented in the late 1980s. The result – “zombie firms” whose bad debts rest endlessly in bank´s balance sheet – avoids nasty surprises but implies a deterioration in resource allocation and lower potential growth. Japan´s per capita income when its bubble busted was four times higher than the current Chinese level, so the questions is whether China can afford this alternative. Add to the former a much less flexible energy matrix – the mayhem in energy prices of the last few months can be traced back to a drop in the supply of coal in China – and I believe concerns on whether China is hitting the middle-income trap could be back in vogue next year.

Needless to say, in a year of U.S. mid-term elections and the 20th congress of the Chinese Communist Party – including the renewal of its Politburo Standing Committee – the geopolitical implications of the U.S. outperforming China could be substantial.

What about our corner of the world? This scenario would imply better news for countries north of Panama, given stronger links with the U.S. via activity, remittances, tourism, to name a few areas, and softer commodity prices affecting South America.

As the region is back to the labyrinth of its solitude, with nominally left- and right-wing governments having in common a poor grasp of international conditions and deplorable policy management, the effects I’ve described are probably going to represent either wasted opportunities or additional maladies. Fed providing, Latin American currencies crosses might offer the best way of expressing intra-regional changes in comparative performance.


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