The government has been renewed in China with the arrival of the new President Xi Jinping, amid doubts about the strength of the Chinese economy. In the United States, Barack Obama has been re-elected at a time when deep fiscal imbalances must be addressed quickly.
It seems that the leaders of these two countries must answer the same question: How can the growth momentum be restored?
The situation in China
In China, the process that was previously based on the combined dynamic of exports and investments must undergo a paradigm change.
Growth was occurring at the expense of household spending, the share of which declined significantly during the 2000s as a percentage of GDP.
But the slowdown in exports, due mainly to sluggish growth in Europe and the United States, is now compelling China to reconsider where its final demand should be coming from.
Domestic consumption: Chinese medicine?
The new Chinese government will need to step up the efforts it has made over the past two years and focus the growth dynamic on household consumption.
This will make it possible to:
- Further enhance the development of social institutions in order to pool the costs and thereby reduce the overall burden. As households will therefore be less constrained/inclined to save, one can hope that they will shift part of their savings to consumption.
- Further develop financial and banking markets to allow savings to be allocated most efficiently over time. This will have a major impact on the overall financial balance.
While the main goal is to bring consumers closer to the heart of the growth process, several other challenges will need to be addressed:
- That of the distribution of income will be major and complex, with a burgeoning middle class and therefore a sufficiently broad base for economic growth, but the process would leave many Chinese on the road side. It is this dialectic that must be questioned for a more harmonious growth dynamic to emerge.
- That of pollution, because if the consumer is to be given a central role at the heart of the growth dynamic, circuit breakers must be implemented in order to meet environmental requirements.
To imagine that nothing will change with the arrival of Xi Jinping (as is often mentioned) would seem unreasonable if one considers the magnitude of the challenges that the Chinese economy will be facing.
United States – A different problem
In the United States, the picture is quite different.
Growth is around 2%, but the possibility of a sudden and sustainable acceleration that would anchor the U.S. economy on a more ambitious growth trajectory, close to the one that the country experienced in the past, seems remote.
Economy undergoing an adjustment phase
The US economy is still in an adjustment phase, with household debt only retreating very gradually.
Consumer spending is actually also less robust than in the past. In order not to oppose this adjustment, the government does not want to constrain the economy further by exerting a strong pressure to reduce the deficit.
In 2012, the U.S. budget deficit is 7% of GDP (more than double that for the entire euro area). The result is naturally a significant accumulation of public debt. But so far, this adjustment process has nevertheless generated a rather stable dynamic.
‘Soft’ method challenged?
However, this modus operandi is potentially challenged, especially in the short term.
This is because the new U.S. administration will have to resolve the so-called ‘fiscal cliff’ issue before the end of 2012.
Since 2001, the U.S. fiscal policy has mainly focused on tax cuts or payroll tax cuts. These cuts were meant to be temporary, with a deadline at the end of this year.
In the absence of a new agreement, the country will return to pre-crisis levels of taxation and payroll taxes.
The shock of such a ‘return to normal’ of tax rates and payroll taxes could be considerable, both for the U.S. and the global economy.
The re-elected president wants to perpetuate the low tax rates but raise the taxation of the highest incomes.
The project already sparked a heated debate in the summer of 2011, in particular between Congress and the White House, without any tangible results being achieved due to the complexity of the relations between the two institutions at that time.
But the situation is different today:
- The legitimacy of the re-elected U.S. President should allow him to push the measure through without it weighing too heavily on the adjustment process.
- But some day the U.S. public finances will have to be restored. While this will not, for the time being, create a funding problem, the key issue will be the prioritization of the action to be taken over time.
The current process is geared toward promoting growth and is expected eventually to trigger the resumption of growth that is then supposed to facilitate fiscal consolidation.
Will this work and can such a virtuous framework be put in place? The question remains.
The profound changes at work throughout the world do not leave any room for the spontaneous emergence of a geographical area that would be capable of achieving a U.S. or China-type leadership that could ‘pull’ the entire global economy.
The euro zone is also undergoing a phase of soul-searching. All these findings confirm the idea that growth must now be based on greater autonomy.