Signals From U.S., China Show How Much Global Economy Has Shifted Since Crisis
Mismatch between world’s No. 1 and No. 2 economies in growth forecasts and policy responses portends market aftershocks
Developments in just the past week underscored a remarkable turnabout in the global economy since the financial crisis.
Six years ago, the U.S. was in financial panic, Europe was seen largely as an innocent bystander and China as an engine for a return to global growth.
Now the U.S. economy is charging ahead—producing jobs at the fastest pace since the late 1990s—while Chinese authorities are struggling to manage a gathering slowdown and Europe is still getting back on its feet.
Emblematic of the shifts are differing monetary signals: Strong U.S. jobs data on Friday increased the likelihood the Federal Reserve will raise short-term interest rates this year, while the People’s Bank of China added to a rate-cutting campaign early this month.
The mismatch in growth outlooks and policy responses portends financial-market aftershocks, including the potential for further gains in the U.S. dollar, which has appreciated 11% against a broad basket of other currencies in the past year and 2% against China’s yuan.
This backdrop also raises a big question: Can the U.S. economy—stronger but still weakened by crisis—power the global economy the way it did in decades past?
Because China accounts for a bigger share of global growth than it did before, its slowdown will surely have bigger global consequences than it might have in the past. But an improving U.S. and stabilizing Europe would help the rest of the world manage to weather China’s problems.
Central to the outlook: the changing patterns of financial stress across the globe.
Fed officials said Thursday that 31 large banks had passed its annual “stress tests” of their financial resilience, meaning they had capital buffers large enough to withstand a return to recession. It was the first time since the Fed launched the tests during the panic of 2009 that all banks had the capital needed to weather the Fed’s test of their financial health.
A construction worker framing a window in the upper floor of a home being built in Orlando, Fla., in February. The U.S. economy is producing jobs at the fastest rate since the late 1990s. ENLARGE
A construction worker framing a window in the upper floor of a home being built in Orlando, Fla., in February. The U.S. economy is producing jobs at the fastest rate since the late 1990s. PHOTO: ASSOCIATED PRESS
With U.S. financial institutions on surer footing, credit growth is accelerating. Commercial and industrial loan portfolios among banks in the U.S. were up 12% in mid-February from a year earlier, at the same time as real-estate and consumer loan portfolios are rising and growth of cash holdings slowing.
“It has been a painful path and somewhat disappointing, but we got to this point with a process of fairly gradual but significant adjustments in private sector [debt], a grinding healing in the financial sector and a Federal Reserve which has been consistently trying to offset [drags on growth],” said Bruce Kasman, chief economist at J.P. Morgan .
Chinese authorities, on the other hand, reduced their growth target for 2015. At 7%, the world’s second-largest economy is still expected to expand faster than almost any other in the world, but the momentum has clearly downshifted.
Growth last year was 7.4%, the slowest pace in nearly a quarter-century. The International Monetary Fund has forecast 6.8% growth for 2015.
Moreover, China’s woes are reflected in the fortunes of other emerging economies oriented toward exporting commodities—Russia and Brazil are both in or near recession.
Chinese authorities are fighting battles that threaten to work at cross-purposes—trying to boost economic output in the short run while also overhauling an economy that became heavily indebted and geared toward real estate in the aftermath of the 2008 financial crisis.
Beijing’s preference for incrementalism is leaving policy makers with fewer appealing options, slower economic growth and tighter budgets at a time when the population is aging rapidly, demanding more comprehensive social services and hungering for a better lifestyle.
While China struggles, Europe is showing some evidence of improvement, which could be an important swing factor in the global economic outlook.
The European Central Bank raised its economic forecasts Thursday for this year and next, in a sign of confidence that Europe’s economy, one of the global economy’s trouble spots for the past five years, is finding its footing even before the ECB launches a €1 trillion-plus ($1.08 trillion-plus) stimulus package on Monday. The bank sees growth above 2% in 2017.
“If Europe would really manage to move towards 2% growth it would make a big difference for the global economy and for China,” said Carsten Brzeski, an economist at ING.
After growing 20% annually from 2006 to 2008, Chinese exports to the eurozone have fallen or stagnated the past four years, he noted. And Europe, particularly Germany, depends on China, which was the top export destination for German machine tools last year.
Germany has started to rebound strongly on the back of a weakening euro, which makes German exports even more competitive in global markets amid low oil prices and rock-bottom interest rates that have fueled a construction boom.
For a global economy that has largely written off Europe for the past five years, any contribution would be welcome. “These days in the eurozone you’re grateful for any growth you can get,” said Howard Archer, an economist at consultancy IHS Global Insight.
