German and Chinese growth models are outdated

Challenges add to the list of global economic vulnerabilities

 
Economists are understandably focused on the uncertain near-term global outlook. But medium- and long-term prospects are discouraging given demographics, US/China tensions, excess leverage, reshoring and often limited macro space. Sustainable growth rates are likely to continue their march downwards during this decade.

Accentuating these woes, the Chinese and German growth models are outdated and in need of overhauling. Whether this happens is an open question. The two account for nearly a quarter of global gross domestic product.

China’s growth in the last two decades has been extraordinary. Before the 2008 financial crisis, it was fuelled by exports, and by large-scale credit growth afterwards.

The quality of growth, however, has been hurt by state-owned banks pumping out excess liquidity to state-owned enterprises, housing speculation and local government inefficiencies. The authorities are now trying to reduce high leverage and financial stability vulnerabilities. Doing so is restraining growth and hurting a weakened housing sector – which by some estimates accounts for up to 30% of GDP. Potential growth this decade is seen as falling to 5%, if not further. Some analysts argue that if only high-quality productive investments were financed, potential growth could be closer to 3%.

The authorities have long discussed shifting activity from investment-led growth to consumerism and services. But that transition isn’t happening at anywhere near a satisfactory pace. While China’s current account surplus – the gap between gross saving and investment – shrunk considerably relative to GDP after the global crisis, very high saving continues to squeeze consumption (Figure 1).

 
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Πηγή: omfif.org