The assumption that China will eventually overtake the US as the world’s largest economy now seems less certain, Eswar Prasad has said
The US has extended its lead over China in the race for the globe’s largest economy, Bloomberg reported on Friday.
The American economy defied forecasts in outperforming China’s last year, according to the media outlet. Many analysts had expected the US to fall into a recession following a series of interest rate hikes by the Federal Reserve, whereas China was expected to post a vibrant and rapid recovery from its Covid lockdowns.
However, the US managed to avoid a recession, while Beijing has struggled to pull itself out of nearly three years of stringent “zero-Covid” pandemic restrictions, the outlet said.
“It is a striking turn of fortunes,” said Eswar Prasad, a former head of the International Monetary Fund’s China division. “The strong performance of the US economy, in tandem with all the short-term and long-term headwinds the Chinese economy is facing, renders it a less obvious proposition that China’s GDP will someday overtake that of the US.”
The US has even managed to widen its advantage, with GDP climbing 6.3% in nominal terms last year, outpacing China’s 4.6% growth.
Many Western analysts expect China’s growth to slow in the long term due to high debt and a housing crisis that has undermined consumer confidence. For 2024, Chinese GDP growth is widely forecast to come in at 4.5% or below. Such a trend may endure for many years in what economists call secular stagnation.
“Secular stagnation – basically a chronic excess of savings leading to slow growth, deflation, asset bubbles and financial strains – has moved from the Western Hemisphere to China,” Lawrence Summers, a former secretary of the US Treasury, said.
Prices are gradually falling to an extent that China hadn’t experienced since the global financial crisis in 2009, a phenomenon known as deflation that could bankrupt heavily indebted households and companies.
Meanwhile, long-term headwinds for the US economy remain amid its record high budget deficit, which has already topped half a trillion dollars, while the Federal Reserve’s inflation target of 2% is yet to be reached. There are also concerns that the Federal Reserve could stick to its tight monetary policy for too long, which could trigger a downturn, Bloomberg said.
According to former Federal Reserve economist Julia Coronado, as quoted by the outlet, the risks of a recession in the US are higher now than at the start of 2023.
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