The Ultimate 2023 Consensus-Buster: US Grows Faster Than China? – McGeever by Reuters

By Jamie McGeever

ORLANDO, Florida – Among the many unpredictable twists faced by investors this year, few were as surprising as the performance of the U.S. economy, which has outpaced that of China.

In January, the forecast for 2023 was quite different: China seemed ready to surge as it emerged from COVID lockdowns, while many anticipated the U.S. would falter under the pressure of the Federal Reserve’s most aggressive rate hikes in four decades, potentially spiraling into recession.

However, the Chinese economy has struggled to regain momentum, and the U.S. narrative is shifting from a ‘soft landing’ to a potentially ‘no landing’ scenario.

The divergent trajectories of these two economic giants serve as a powerful reminder that many investor assumptions and models have been upended by the pandemic.

China’s economy recorded a mere 0.8% growth in the second quarter compared to the first quarter, which had seen an inflated growth of 2.2% due to the rebound from prior lockdowns. In contrast, the U.S. economy expanded by 1.2% in the second quarter, following a growth rate of 1.6% in the first three months of the year—modest but significant when compared to a counterpart that was expected to be advancing more rapidly.

Current indicators suggest that this economic dynamic is unlikely to change soon, especially given ongoing tensions between the two nations concerning technology, cybersecurity, espionage, and trade. The Atlanta Federal Reserve’s real-time GDPNow tracker indicates an annualized growth rate of 5.8% for the U.S. economy in the third quarter, which would more than double the annualized growth seen in the first half of the year.

Meanwhile, the outlook for China’s growth has dimmed. Economists have revised their GDP growth forecasts for the third and fourth quarters downward, signaling a potential miss of the Chinese government’s goal of around 5% growth for the year.

While China’s long-term growth potential might still be higher than that of the United States, doubts are emerging about when, or if, its GDP will surpass that of the U.S. Analysts have mixed opinions on when this might occur, with estimates ranging from 2035 to potentially not happening for at least 20 years.

Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies, argues that while concerns about China’s economic fortitude are exaggerated, the days of rapid growth rates are likely behind us. The prevailing narrative has shifted, reflecting a reversal of perceptions about the two nations’ economic trajectories.

China’s GDP per capita was reported at $12,720 last year, significantly lower than the nearly $76,000 per capita in the U.S. This discrepancy raises concerns about China’s economic health as it struggles to achieve growth comparable to that of the U.S.

However, caution is warranted regarding the prevailing narrative of U.S. optimism contrasted with Chinese pessimism, as earlier highs and lows in their economic performance could stabilize as expectations are recalibrated. The effects of the Federal Reserve’s tightening policies have yet to fully materialize, and rising bond yields could impact both the financial markets and the broader economy.

Additionally, it’s possible that the Chinese government could unexpectedly revitalize economic activity through significant monetary and fiscal policies, as it has previously.

Despite these alternatives, substantial capital has been withdrawn from Chinese markets this year, with the gap between U.S. and Chinese bond yields reaching its widest point since 2007, while the yuan hovers near its weakest level in the same timeframe. Pervasive issues such as deflation, high youth unemployment, a distressed property market, low bank lending, and plummeting trade complicate the outlook for China, making swift recovery unlikely.

Market analysts at Citi warn that ongoing economic disappointments will likely keep anxiety alive over the potential for a hard landing in China.

(These views are those of the author, a columnist for Reuters.)