UBS GUEST COMMENT
BY CONSTANTIN VAYENAS
Every economic cycle expands our vocabulary. The 1990s were the years of “irrational exuberance,” ending in the 2000-01 downturn dubbed the “shallow recession.” The recovery spawned the term “decoupling.” Today, having “fallen off a cliff,” the US economy is currently in a “shambles,” according to Warren Buffett. But Fed Chairman Ben Bernanke now sees “green shoots” of recovery emerging.
We are not so sure. While the US economy may be shrinking more slowly than it did at the end of 2008, it is still shrinking. And we expect it to continue to contract for another couple of months, if not quarters. Rather, we think China can more fairly claim those “green shoots.” After slowing sharply late last year, growth has resumed at an even faster pace than many economists had expected. This is surely good news, but can China's growth pull the world economy along with it? And could the Chinese consumer replace the stricken US consumer as an engine of demand?
Some simple calculations give us the answers: No and no. China is either the world's second- or the third-largest economy, depending on the exchange rate used. At market exchange rates – taking yuan at face value, converted into US dollars – China's economy is between a quarter and third the size of the US economy. In terms purchasing power parity – acknowledging that a yuan buys far more in China than it would in the US when converted into dollars – China's economy is somewhere between a third and a half that of the US.
Assuming, optimistically, that the Chinese economy is half as big as America's, then GDP growth of one percent in China should have an impact on the world economy comparable to half-a-percent growth in the US. However, looking at consumption, we need to consider its importance in the overall economy. In the US, consumption still makes up roughly 70% of GDP, one of the highest levels in the world; in China, consumption is only 35% of GDP, one of the world's lowest. Therefore to compensate for 1% consumption growth in the US, Chinese consumption must grow by fully 4%!
But wait, there is even more, or actually less, to the comparison. The US has roughly 300 million inhabitants. At 1.2 billion, China's population is four times that sum. Thus, in fact, the average Chinese consumes sixteen times less than the average American. Not to mention their very different consumption patterns in each country.
The average Chinese consumer today rather resembles his or her peer in Japan or Europe in the 1950s, when consumption really began increasing demand for commodities. Now, consider that the current rebound in China is fueled by massive fiscal stimulus aimed at infrastructure projects, which are also commodity-intensive. It's safe to assume that a Chinese rebound, if sustained, will push commodity prices higher in the coming quarters, lifting inflation rates along with them.
So China's green shoots may not significantly boost global growth, though they may well help the world economy avoid deflation. And, with their hunger for commodities, these shoots might even be the first flush of surging worldwide inflation yet to come.
Dr. Constantin Vayenas is Head of Emerging Market Research, UBS Wealth Management Research.
