the state of the global economy
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The State of the Global Economy. Lawrence J. Lau , Ph. D. Ralph and Claire Landau Professor of Economics , The Chinese Univ. of Hong Kong and Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University Executive Leadership Programme - PowerPoint PPT PresentationTRANSCRIPT
The State of the Global EconomyLawrence J. Lau, Ph. D.
Ralph and Claire Landau Professor of Economics, The Chinese Univ. of Hong Kongand
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University
Executive Leadership ProgrammeInstitute of Global Economics and Finance
The Chinese University of Hong Kong27th August 2012
Tel: (852)3550-7070; Fax: (852)2104-6938Email: [email protected]; WebPages: www.igef.cuhk.edu.hk/ljl
*All opinions expressed herein are the author’s own and do not necessarily reflect the views of any of the organisations with which the author is affiliated.
Lawrence J. Lau 2
Outline Introduction Changing Patterns in the Global Economy The Chinese Economy in the Global Context The Near-Term Macroeconomic Outlook of the World
Economy Concluding Remarks
Lawrence J. Lau 3
Introduction The global economy has been in a state of turmoil since the
outbreak of the global financial crisis in 2007, beginning with the sub-prime loan crisis in the United States, and followed by the bankruptcy of Lehman Brothers in September 2008. And just when the global economy appeared to stabilise in 2009, the European sovereign debt crisis broke out, first in Greece, and then spread to Ireland, Portugal, Italy and Spain.
Recovery slowed down in the U.S. because of the European sovereign debt crisis, which reduced European demand for U.S. exports, even as the U.S. rate of interest became super-low because of the flight to safe haven effect. The Euro Zone economies went into a recession and global trade flows declined.
Lawrence J. Lau 4
Introduction Throughout this crisis, however, the BRICS countries
(Brazil, Russia, India, China and South Africa) continued to do reasonably well. China, in particular, was able to maintain its real rate of growth above 7.5%, lending credence to the “Partial De-Coupling Hypothesis”, that is, the Chinese economy can continue to grow, albeit at a slower rate, even as the U.S. and European economies go into economic recession. The same applies, to a greater or lesser degree, to the other BRICS economies.
This partial de-coupling can occur because of the gradual shift in the centre of gravity of the World economy from the United States and Western Europe to Asia over the past three decades.
Lawrence J. Lau 5
Changing Patterns in the Global Economy:The Shifting Centre of Gravity During the past three decades, the centre of gravity of the World
economy has been gradually shifting from the United States and Europe to Asia, including both East Asia and South Asia.
The East Asian and South Asian economies have become partially de-coupled from the rest of the World economy, as evidenced by the strong performance of China, India and other East Asian economies during the 2007-2009 global financial crisis and the current European sovereign debt crisis.
However, the Chinese economy alone is not large enough to turn the World around. The idea of a G-2 group of countries consisting of China and the United States leading the World economy is premature.
Lawrence J. Lau 6
Changing Patterns in the Global Economy:GDP In 1970, the United States and Western Europe together
accounted for over 60% of World GDP. By comparison, East Asia (defined as the 10 Association of Southeast Asian Nations (ASEAN) + 3 (China, Japan and the Republic of Korea) and South Asia combined accounted for less than 15% of World GDP.
In 1990, the United States and Western Europe together still accounted for over 55% of World GDP while East Asia and South Asia combined accounted for not quite 20% of World GDP.
By 2011, the share of United States and Western Europe in World GDP has declined to approximately 45% whereas the share of East Asia and South Asia have risen to almost 30%.
Lawrence J. Lau 77
The Distribution of World GDP, 1970, US$
The Distribution of World GDP in 1970, in USD
United States35.4%
Euro Zone21.5%
Japan7.2%
Other Economies24.5%
India2.2%
Korea, Rep. of0.3%
United Kingdom4.3%Brazil1.5%
China3.2%
Lawrence J. Lau 88
The Distribution of World GDP, 1990, US$
The Distribution of World GDP in 1990, in USD
United States26.2%
Euro Zone25.9%Japan
14.1%
Other Economies20.5%
Korea, Rep. of1.2%
United Kingdom4.6%
China1.6%
India1.5%
Brazil2.1%
Russian Federation2.4%
Lawrence J. Lau 99
The Distribution of World GDP, 2011, US$
The Distribution of World GDP in 2011, in USD
United States21.6%
Euro Zone18.7%
Japan8.4%
Other Economies27.0%
Korea, Rep. of1.6%
United Kingdom3.5%
China10.4%
India2.6%
Brazil3.5%
Russian Federation2.7%
Lawrence J. Lau 10
Changing Patterns in the Global Economy:GDP The East Asian (defined as the 10 Association of Southeast
Asian Nations (ASEAN) + 3 (China, Japan and the Republic of Korea) share of World GDP rose from just above 10% in 1970 to slightly below 25% in 2011.
The members of ASEAN are Brunei, Indonesia, Khmer Republic, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
The Chinese share of World GDP alone rose from less than 2% in 1970 to approximately 10% in 2011.
Lawrence J. Lau 1111
East Asian Share of World GDP,current prices, 1960-present
East Asian Share of World GDP, 1960-present
10
12
14
16
18
20
22
24
26
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Per
cen
t
Lawrence J. Lau 1212
China’s Share of World GDP,current prices, 1960-present
China's Share of World GDP, 1960-present
0
1
2
3
4
5
6
7
8
9
10
11
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Per
cen
t
Lawrence J. Lau 13
China and East Asia’s Share of World GDP, 1960-present (Current Prices)
China's and East Asia's Share of World GDP, 1960-present
0
2
4
6
8
10
12
14
16
18
20
22
24
26
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Per
cen
t
East Asian Economies
Mainland China
Lawrence J. Lau 14
Changing Patterns in the Global Economy:Economic Growth China, India and South Korea are among the fastest growing
economies during the past four decades. Russia has also grown at a very high rate during the past
decade because of its significant oil production. Brazil has also grown very fast during the past decade
because of the world natural resource boom. However, all the developed economies—the U.S., Euro
Zone, Japan, and the U.K.—had relatively low and declining growth rates during the past decades.
Lawrence J. Lau 1515
Average Annual Rates of Growth ofReal GDP of Selected Economies
Average Annual Rates of Growth of Real GDP of Selected Economies
-6
-4
-2
0
2
4
6
8
10
12
14
United States Euro Zone Japan China RussianFederation
India Brazil UnitedKingdom
Korea, Rep.of
Per
cen
t
1970-1980 1980-1990
1990-2000 2000-2011
Lawrence J. Lau 16
Changing Patterns in the Global Economy:Inflation The rate of global inflation has on the whole declined
significantly over the past few years. Both Brazil and Russia experienced hyper-inflation of the
order of 1,000% a year in the 1990s. Even China had a couple of years of double-digit inflation in the 1990s.
The rate of inflation has come down for both major developed and developing economies in recent years, with the possible exception of India.
Lawrence J. Lau 1717
The Rate of Inflation in Selected Economies
The Rate of Growth of CPI in Selected Economies
-500
0
500
1000
1500
2000
2500
3000
3500
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Per
cen
t
United States Euro ZoneJapan ChinaRussian Federation IndiaBrazil United KingdomKorea, Rep. of
Lawrence J. Lau 1818
The Rate of Inflation in Selected Economies (without Brazil)
The Rate of Growth of CPI in Selected Economies (without Brazil)
-100
0
100
200
300
400
500
600
700
800
900
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Per
cen
t
United States Euro Zone
Japan China
Russian Federation India
United Kingdom Korea, Rep. of
Lawrence J. Lau 1919
The Rate of Inflation in Selected Economies (without Brazil and Russia)
The Rate of Growth of CPI of Selected Economies (without Brazil and Russia)
-10
-5
0
5
10
15
20
25
30
35
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Per
cen
t
United States Euro Zone
Japan China
India United Kingdom
Korea, Rep. of
Lawrence J. Lau 20
Changing Patterns in the Global Economy:International Trade In 1970, the United States and Western Europe together
accounted for over 60% of World trade. By comparison, East Asia and South Asia combined accounted for less than 10% of World trade.
In 1990, the United States and Western Europe together still accounted for approximately 55% of World trade while East Asia and South Asia combined accounted for just over 10% of World trade.
By 2010, the share of United States and Western Europe in World trade has declined to below 45% whereas the share of East Asia and South Asia has risen to almost 30%.
Lawrence J. Lau 2121
The Distribution of Total International Trade in Goods and Services, 1970
The Distribution of Total International Trade in Goods and Services in 1970
United States14.9%
Japan5.4%India
0.6%
Other Economies37.8%
Korea, Rep. of0.4%
United Kingdom7.0%
Brazil0.8%
China0.6%
Euro Zone32.4%
Lawrence J. Lau 2222
The Distribution of Total International Trade in Goods and Services, 1990
The Distribution of Total International Trade in Goods and Services in 1990
United States13.5%
Other Economies32.9%
Japan7.0%Russian
Federation3.7%
Korea, Rep. of1.7%
United Kingdom5.8%
Brazil0.8%
India0.6% China
1.2%
Euro Zone34.4%
Lawrence J. Lau 2323
The Distribution of Total International Trade in Goods and Services, 2010
The Distribution of Total International Trade in Goods and Services in 2010
United States11.3%
Japan4.3%
Other Economies37.4%
RussianFederation
1.6%
Korea, Rep. of2.8%
United Kingdom3.8%
Brazil1.3%
India2.2%
China8.8%
Euro Zone26.1%
Lawrence J. Lau 24
Changing Patterns in the Global Economy:International Trade The East Asian (defined as the 10 Association of Southeast
Asian Nations (ASEAN) + 3 (China, Japan and the Republic of Korea) share of World trade rose from 10% in 1970 to just below 25% in 2011.
The Chinese share of World trade rose from 1% in 1970 to 10% in 2011.
Chinese international trade accounted for more than 40% of East Asian international trade in 2011.
Lawrence J. Lau 2525
The Rising Share of East Asian Trade in Total World Trade, 1960-present
The Rising Share of East Asian Trade in Total World Trade, 1960-present
0
5
10
15
20
25
30
35
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Per
cen
t
Share of World Exports
Share of World Imports
Share of Total World Trade
Lawrence J. Lau 2626
The Share of Chinese Trade in Total World Trade, 1950-present
The Share of Chinese Trade in Total World Trade, 1950-present
0
1
2
3
4
5
6
7
8
9
10
11
12
19
50
19
51
19
52
19
53
19
54
19
55
19
56
19
57
19
58
19
59
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Per
cen
t
The ratio of Chinese Exports to World Exports
The ratio of Chinese Imports to World Imports
The ratio of Chinese Total Trade to World Total Trade
Lawrence J. Lau 27Lawrence J. Lau, The Chinese University of Hong Kong 27
The Share of Chinese Trade in Total East Asian Trade, 1952-present
TheShare of Chinese Trade in Total East Asian Trade, 1952-present
0
5
10
15
20
25
30
35
40
45
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Per
cen
t
The Ratio of Chinese Exports to East Asian Exports
The Ratio of Chinese Imports to East Asian Imports
The Ratio of Chinese Total Trade to East Asian Total Trade
Lawrence J. Lau 28
Changing Patterns in the Global Economy:International Trade A particularly interesting development is the rise in intra-
East Asian international trade. The share of East Asian trade destined for East Asia has risen to over 50% in the past decade. This is a sea-change compared to 30 years ago when most of the East Asian exports were destined for either the United States or Western Europe.
Similarly, the share of East Asian imports originated from East Asia has remained above 45%.
Lawrence J. Lau 2929
The Share of East Asian ExportsDestined for East Asia
The Share of East Asian Exports Destined for East Asia
35
37
39
41
43
45
47
49
51
53
Jan-
98A
pr-9
8Ju
l-98
Oct
-98
Jan-
99A
pr-9
9Ju
l-99
Oct
-99
Jan-
00A
pr-0
0Ju
l-00
Oct
-00
Jan-
01A
pr-0
1Ju
l-01
Oct
-01
Jan-
02A
pr-0
2Ju
l-02
Oct
-02
Jan-
03A
pr-0
3Ju
l-03
Oct
-03
Jan-
04A
pr-0
4Ju
l-04
Oct
-04
Jan-
05A
pr-0
5Ju
l-05
Oct
-05
Jan-
06A
pr-0
6Ju
l-06
Oct
-06
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Jan-
12
%
Lawrence J. Lau 30Lawrence J. Lau, The Chinese University of Hong Kong 30
The Share of East Asian ImportsOriginated from East Asia
The Share of East Asian Imports Originated from East Asia
45
47
49
51
53
55
57
59
Jan-
98A
pr-9
8Ju
l-98
Oct
-98
Jan-
99A
pr-9
9Ju
l-99
Oct
-99
Jan-
00A
pr-0
0Ju
l-00
Oct
-00
Jan-
01A
pr-0
1Ju
l-01
Oct
-01
Jan-
02A
pr-0
2Ju
l-02
Oct
-02
Jan-
03A
pr-0
3Ju
l-03
Oct
-03
Jan-
04A
pr-0
4Ju
l-04
Oct
-04
Jan-
05A
pr-0
5Ju
l-05
Oct
-05
Jan-
06A
pr-0
6Ju
l-06
Oct
-06
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Jan-
12
%
Lawrence J. Lau 31
Changing Patterns in the Global Economy:Growth in International Trade South Korea, and more recently, China, India, Brazil and
Russia, have had the highest rates of growth in international trade.
Growth in Chinese international trade has been particularly rapid during the past decade because of its accession to the World Trade Organisation (WTO).
India, Russia and Brazil have also had exceptionally high growth in their international trade during the past decade.
However, all the developed economies—the U.S., Euro Zone, Japan, and the U.K.—had relatively low and declining rates of growth of international trade during the past decades.
Lawrence J. Lau 3232
Average Annual Rate of Growth of Total International Trade in Goods and Services
Average Annual Rates of Growth of Total Real Trade in Goods and Services, in 2000 USD
-5
0
5
10
15
20
United States Euro Zone Japan China RussianFederation
India Brazil UnitedKingdom
Korea, Rep.of
Per
cen
t
1971-1980 1980-1990
1990-2000 2000-2010
Lawrence J. Lau 33
Changing Patterns in the Global Economy:Official Foreign Exchange Reserves The central banks of the East Asian and South Asian
economies combined now hold huge foreign exchange reserves. China leads the pack with foreign exchange reserves in excess of US$3.2 trillion, almost all of which has been acquired during the past decade, followed by Japan with US$1.2 trillion.
The People’s Bank of China, China’s central bank, is now the World’s largest holder of U.S. Treasury securities, with not quite US$1.2 trillion, followed by Japan as a close second.
Lawrence J. Lau 3434
Total Foreign Exchange Reserves minus Gold, Selected Countries and Regions
Total Reserves minus Gold of Selected Countries and Regions
0
500
1,000
1,500
2,000
2,500
3,000
3,500
M1
19
85
M7
19
85
M1
19
86
M7
19
86
M1
19
87
M7
19
87
M1
19
88
M7
19
88
M1
19
89
M7
19
89
M1
19
90
M7
19
90
M1
19
91
M7
19
91
M1
19
92
M7
19
92
M1
19
93
M7
19
93
M1
19
94
M7
19
94
M1
19
95
M7
19
95
M1
19
96
M7
19
96
M1
19
97
M7
19
97
M1
19
98
M7
19
98
M1
19
99
M7
19
99
M1
20
00
M7
20
00
M1
20
01
M7
20
01
M1
20
02
M7
20
02
M1
20
03
M7
20
03
M1
20
04
M7
20
04
M1
20
05
M7
20
05
M1
20
06
M7
20
06
M1
20
07
M7
20
07
M1
20
08
M7
20
08
M1
20
09
M7
20
09
M1
20
10
M7
20
10
M1
20
11
M7
20
11
M1
20
12
US
D b
illi
on
s
China, Mainland
Japan
Russia
Taiwan Prov. Of China
India
Lawrence J. Lau 3535
Major Foreign Central Banks’ Holdings of U.S. Treasury Securities
Major Foreign Central Bank's Holders of U.S. Treasury Securities
0
200
400
600
800
1000
1200
1400
Ma
r-0
0J
un
-00
Sep
-00
Dec
-00
Ma
r-0
1J
un
-01
Sep
-01
Dec
-01
Ma
r-0
2J
un
-02
Sep
-02
Dec
-02
Ma
r-0
3J
un
-03
Sep
-03
Dec
-03
Ma
r-0
4J
un
-04
Sep
-04
Dec
-04
Ma
r-0
5J
un
-05
Sep
-05
Dec
-05
Ma
r-0
6J
un
-06
Sep
-06
Dec
-06
Ma
r-0
7J
un
-07
Sep
-07
Dec
-07
Ma
r-0
8J
un
-08
Sep
-08
Dec
-08
Ma
r-0
9J
un
-09
Sep
-09
Dec
-09
Ma
r-1
0J
un
-10
Sep
-10
Dec
-10
Ma
r-1
1J
un
-11
Sep
-11
Dec
-11
Ma
r-1
2J
un
-12
US
D b
illi
on
s
China, Mainland
Japan
Russia
United Kingdom
Brazil
Lawrence J. Lau 36
Changing Patterns in the Global Economy:Capital Markets Over the years, the capital markets in East Asian economies
have also grown. At year end 2011, the combined market capitalisation of all East Asian stock exchanges amounted to US$14.3 trillion, behind the market capitalisation of U. S. stock exchanges of US$17.3 trillion but ahead of the market capitalisation of all European stock exchanges combined of US$10.9 trillion.
Again, this is a relatively recent phenomenon. For example, the Chinese stock exchanges at Shanghai and Shenzhen did not get started until the mid-1990s.
Lawrence J. Lau 3737
End of Year Market Capitalisation of Selected Stock Exchanges
End of Year Market Capitalisation of Selected Stock Exchanges, in USD billions
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
US
D b
illi
on
s
Hong Kong Exchanges
Tokyo SE
Shanghai+Shenzhen SE
NYSE
London SE
Lawrence J. Lau 38
Market Capitalization of Stock ExchangesYear End 2011 (US$) U.S.A. 17.3 trillion Europe 10.9 trillion East Asia 14.3 trillion
Exchanges: U.S.A.: NASDAQ and NYSE Europe: Athens Exchange, BME Spanish Exchanges, Budapest
SE, Cyprus SE, Deutsche Borse, Irish SE, London SE group, Luxembourg SE, NYSE Euronext (Europe), Oslo Bors, SIX Swiss Exchange
East Asia: Bursa Malaysia, Hong Kong Exchanges, Indonesia SE, Korea Exchange, Philippine SE, Shanghai SE, Shenzhen SE, Singapore Exchange, Taiwan SE, Thailand SE, Tokyo SE Group
Data source: World Federation of Exchanges
Lawrence J. Lau 39
The Chinese Economy in the Global Context China has made tremendous progress in its economic
development since it began its economic reform and opened to the World in 1978. China is currently the fastest growing economy in the World—averaging 9.8% per annum over the past 33 years. It is historically unprecedented for an economy to grow at such a high rate over such a long period of time.
Between 1978 and 2011, Chinese real GDP grew almost 22 times, from US$333 billion to nearly US$7.5 trillion (2011 prices) to become the second largest economy in the World, after the U.S.
By comparison, the U.S. GDP (approx. US$15.1 trillion) was 2 times Chinese GDP in 2011.
Lawrence J. Lau 40
Real GDP and Its Rate of Growth: A Comparison of China and the U.S. (2011$)
-4
-2
0
2
4
6
8
10
12
14
16
18
-4
-2
0
2
4
6
8
10
12
14
16
18
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Percen
tU
SD
tri
llio
ns,
20
11 p
rice
s
Real GDP and Its Rate of Growth: A Comparison of China and the U.S.
Growth Rate of U.S. Real GDP (right scale) Growth Rate of Chinese Real GDP (right scale)
U.S. Real GDP Chinese Real GDP
Lawrence J. Lau 41
The Chinese Economy in the Global Context Despite its rapid growth, in terms of its real GDP per capita,
China is still a developing economy. Between 1978 and 2011, Chinese real GDP per capita grew
15 times, from US$346 to US$5,555 (in 2011 prices). By comparison, the U.S. GDP per capita of approximately US$48,236, was 8.7 times Chinese GDP per capita in 2011.
Lawrence J. Lau 42
Real Chinese and U.S. GDP per Capita in US$ Since 1952 (2011 Prices)
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
-18
-12
-6
0
6
12
18
24
30
36
42
48
54
197
8
197
9
198
0
198
1
198
2
198
3
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
2011
Percen
tU
SD
th
ou
san
ds,
20
11 p
rice
s
Real GDP per Capita and Its Rate of Growth: A Comparison of China and the U.S.
Growth Rate of U.S. Real GDP per Capita (right scale)Growth Rate of Chinese Real GDP per capita (right scale)U.S. Real GDP per CapitaReal GDP per capita of China
Lawrence J. Lau 43
The Chinese Economy in the Global Context While many problems have arisen in the Chinese economy
within the past decade—for example, increasing income disparity (both inter-regional and intra-regional), uneven access to basic education and health care, environmental degradation, inadequate infrastructure and corruption—it is fair to say that every Chinese citizen has benefited from the economic reform and opening since 1978, albeit to varying degrees, and few want to return to the central planning days.
Lawrence J. Lau 44
The Chinese Economy in the Global Context The Chinese Government leaders have also amply
demonstrated their ability to confront important challenges and solve difficult problems over the past 34 years, surviving various economic and financial crises such as the 1997-1998 East Asian currency crisis, the 2007-2009 global financial crisis and the more recent European sovereign debt crisis.
China is one of the very few socialist countries that have made a smooth transition from a centrally planned to a market economy. It is a model for other transition economies such as Vietnam and potential transition economies such as Cuba, Laos, and North Korea.
Lawrence J. Lau 45
The Near-Term Macroeconomic Outlook of the World Economy The macroeconomic outlook of the World economy is
rather negative as the U.S. economic recovery has apparently stalled and the Euro Zone economies continue to be affected by their sovereign debt crisis. The economic weakness in both the United States and the Euro Zone has reduced economic growth rates around the World, including those of China and India.
The rates of unemployment have continued to be high for both the U.S. and for the Euro Zone and are unlikely to decline significantly in the near term.
Fortunately, the rates of inflation have remained relatively subdued and in the case of China the rate of inflation has also begun to come down significantly.
Lawrence J. Lau 4646
The Rates of Growth of Real GDP of China, U.S. and the Euro Zone
-5
0
5
10
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Per
cen
t
The Rates of Growth of Real GDP of China, U.S. and the Eurozone
China U.S. Euro Area
Lawrence J. Lau 4747
The Rates of Unemployment of China, U.S. and the Euro Zone
0
1
2
3
4
5
6
7
8
9
10
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Per
cen
t
The Rates of Unemployment of China, U.S. and the Eurozone
China
U.S.
Euro Area
Lawrence J. Lau 4848
The Rates of Inflation of China, U.S. and the Euro Zone
-6
-4
-2
0
2
4
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Per
cen
t
The Rate of Inflation of China, U.S. and the Euro Zone
China U.S. Euro Area
Lawrence J. Lau 49
The Near-Term Macroeconomic Outlook of the World Economy Under these circumstances, inevitably, the real rate of
growth of world trade has also declined significantly.
Lawrence J. Lau 5050
Nominal and Real Rates of Growth of World Trade in Goods and Services
-22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8
10 12 14 16 18 20 22
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Per
cen
t
Rates of Growth of Nominal and Real World Trade in Goods and Services
Real Growth Rates of World Trade in Goods and Services
Nominal Growth Rates of World Trade in Goods and Services
Lawrence J. Lau 5151
Nominal and Real Rates of Growth of World Trade in Goods
-24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8
10 12 14 16 18 20 22 24
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Per
cen
t
Rates of Growth of Nominal and Real World Trade in Goods
Real Rate of Growth of World Trade in Goods
Nominal Rate of Growth of World Trade in Goods
Lawrence J. Lau 52
The Near-Term Macroeconomic Outlook: The U.S. Economy Economic recovery in the U.S. has been slow and gradual,
and has been affected internally by the uncertainties created by the “fiscal cliff” at the end of this year as well as the forthcoming Presidential election in November and externally by the European sovereign debt crisis and the resulting recession in the Euro Zone economies.
Decisions on large investment projects by private firms are likely to be postponed until early next year when many of the uncertainties are resolved.
However, it does appear that the recovery is solid and real, and that with a resolution of the European sovereign debt crisis, the U.S. economy should be able to embark on a renewed path of growth some time early in 2013.
Lawrence J. Lau 5353
Seasonally Adjusted Annualised Quarterly Rates of Growth of Real GDP of the U.S.
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Q1 1
990
Q2 1
990
Q3 1
990
Q4 1
990
Q1 1
991
Q2 1
991
Q3 1
991
Q4 1
991
Q1 1
992
Q2 1
992
Q3 1
992
Q4 1
992
Q1 1
993
Q2 1
993
Q3 1
993
Q4 1
993
Q1 1
994
Q2 1
994
Q3 1
994
Q4 1
994
Q1 1
995
Q2 1
995
Q3 1
995
Q4 1
995
Q1 1
996
Q2 1
996
Q3 1
996
Q4 1
996
Q1 1
997
Q2 1
997
Q3 1
997
Q4 1
997
Q1 1
998
Q2 1
998
Q3 1
998
Q4 1
998
Q1 1
999
Q2 1
999
Q3 1
999
Q4 1
999
Q1 2
000
Q2 2
000
Q3 2
000
Q4 2
000
Q1 2
001
Q2 2
001
Q3 2
001
Q4 2
001
Q1 2
002
Q2 2
002
Q3 2
002
Q4 2
002
Q1 2
003
Q2 2
003
Q3 2
003
Q4 2
003
Q1 2
004
Q2 2
004
Q3 2
004
Q4 2
004
Q1 2
005
Q2 2
005
Q3 2
005
Q4 2
005
Q1 2
006
Q2 2
006
Q3 2
006
Q4 2
006
Q1 2
007
Q2 2
007
Q3 2
007
Q4 2
007
Q1 2
008
Q2 2
008
Q3 2
008
Q4 2
008
Q1 2
009
Q2 2
009
Q3 2
009
Q4 2
009
Q1 2
010
Q2 2
010
Q3 2
010
Q4 2
010
Q1 2
011
Q2 2
011
Q3 2
011
Q4 2
011
Q1 2
012
Q2 2
012
Per
cen
t p
er a
nn
um
Seasonally Adjusted Annualized Quarterly Rates of Growth of Real GDP of the U.S.
Lawrence J. Lau 54
The Near-Term Macroeconomic Outlook:The U.S. Economy While the U. S. economy is no longer contracting—the real rates
of growth of the economy have been positive since the third quarter of 2009—the economic recovery has been exceptionally slow despite record low rates of interest (see the following Charts).
The unemployment rate has stayed stubbornly high, above 8%, and is unlikely to fall significantly in the near term. The effectiveness of an easy monetary policy is in serious doubt. In fact, the real rate of interest, the difference between the nominal rate of interest and the rate of inflation (measured by the consumer price index (CPI)), has been negative since November 2009 (see the following Charts). The U.S. economy is in a classical “liquidity trap” situation.
As is well known, one can pull on a string but not push on a string. Further lowering of the rate of interest and release of liquidity in the U.S. is unlikely to increase domestic investment, especially given all the uncertainties of this presidential election year.
Lawrence J. Lau 5555
The Rates of Change of CPI, Interest, & Unemployment, & Index of Euro/US$ Exchange Rate
80
85
90
95
100
105
110
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
Jan-
2007
Feb
-200
7M
ar-2
007
Ap
r-20
07M
ay-2
007
Jun-
2007
Jul-
2007
Au
g-20
07S
ep-2
007
Oct
-200
7N
ov-2
007
Dec
-200
7Ja
n-20
08F
eb-2
008
Mar
-200
8A
pr-
2008
May
-200
8Ju
n-20
08Ju
l-20
08A
ug-
2008
Sep
-200
8O
ct-2
008
Nov
-200
8D
ec-2
008
Jan-
2009
Feb
-200
9M
ar-2
009
Ap
r-20
09M
ay-2
009
Jun-
2009
Jul-
2009
Au
g-20
09S
ep-2
009
Oct
-200
9N
ov-2
009
Dec
-200
9Ja
n-20
10F
eb-2
010
Mar
-201
0A
pr-
2010
May
-201
0Ju
n-20
10Ju
l-20
10A
ug-
2010
Sep
-201
0O
ct-2
010
Nov
-201
0D
ec-2
010
Jan-
2011
Feb
-201
1M
ar-2
011
Ap
r-20
11M
ay-2
011
Jun-
2011
Jul-
2011
Au
g-20
11S
ep-2
011
Oct
-201
1N
ov-2
011
Dec
-201
1Ja
n-20
12F
eb-2
012
Mar
-201
2A
pr-
2012
May
-201
2Ju
n-20
12
2007
M1=
100
Per
cen
t
The Rates of Change of U.S. CPI, Interest, and Unemployment,and Index of Euro/US$ Exchange Rate
The Rate of Change of CPI
The Rate of Interest (1-year U.S. Treasury)
Unemployment Rate
Euro/USD, 2007M1=100 (right scale)
Lawrence J. Lau 5656
Seasonally Adjusted Monthly Rates of Unemployment in the U.S.
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
Jan-
194
8J
an-
194
9J
an-
195
0J
an-
195
1J
an-
195
2J
an-
195
3J
an-
195
4J
an-
195
5J
an-
195
6J
an-
195
7J
an-
195
8J
an-
195
9J
an-
196
0J
an-
196
1J
an-
196
2J
an-
196
3J
an-
196
4J
an-
196
5J
an-
196
6J
an-
196
7J
an-
196
8J
an-
196
9J
an-
197
0J
an-
197
1J
an-
197
2J
an-
197
3J
an-
197
4J
an-
197
5J
an-
197
6J
an-
197
7J
an-
197
8J
an-
197
9J
an-
198
0J
an-
198
1J
an-
198
2J
an-
198
3J
an-
198
4J
an-
198
5J
an-
198
6J
an-
198
7J
an-
198
8J
an-
198
9J
an-
199
0J
an-
199
1J
an-
199
2J
an-
199
3J
an-
199
4J
an-
199
5J
an-
199
6J
an-
199
7J
an-
199
8J
an-
199
9J
an-
200
0J
an-
200
1J
an-
200
2J
an-
200
3J
an-
200
4J
an-
200
5J
an-
200
6J
an-
200
7J
an-
200
8J
an-
200
9J
an-
201
0J
an-
2011
Jan-
201
2
Per
cen
t
Month
Monthly Rates of U.S. Unemployment, seasonally adjusted
Lawrence J. Lau 57
The Near-Term Macroeconomic Outlook:The U.S. Economy The problem is that expectations can be self-fulfilling in the
absence of any clear signal of change. If firms and households expect the economy to do terribly and act accordingly by reducing investment and consumption respectively, the economy will indeed turn out to be terrible, fulfilling their expectations.
This may lead them to expect a further worsening of the economy, and act accordingly, resulting in an even further decline of the economy, creating a self-perpetuating downward spiral in which negative expectations lead to declines and declines feed into even more negative expectations.
This has been, unfortunately, the story of the Japanese economy since its property price bubble burst in 1990. In order for expectations to change, there must be some concrete action that can act as a signal to the firms and households that the economy will be improving soon.
Lawrence J. Lau 58
The Near-Term Macroeconomic Outlook:The U.S. Economy The World economy has already experienced both
“Quantitative Easing I (QE-I)” and “Quantitative Easing II (QE-II)” operations by the U.S. Federal Reserve Board. However, these operations did not seem to have done the U.S. real economy much good. Much of the excess liquidity generated went overseas, driving up exchange rates and asset prices elsewhere. If the U.S. had some form of capital control, so that the excess liquidity had to be kept and used within the U.S., it might perhaps have driven up some U.S. asset prices and led to some additional domestic investment. However, that has not been the case.
Lawrence J. Lau 59
The Near-Term Macroeconomic Outlook:The U.S. Economy At this point, only an expansion of real aggregate demand
can serve as an effective signal for a change in expectations. However, it does not appear likely that the U.S. Congress will authorise a fiscal expansion, even though that is exactly what is needed.
There is ample excess capacity in the U.S. economy, especially in the construction sector and the building materials sector. What the U.S. Government should undertake is an expansion in capital expenditures focused on public infrastructure on the one hand and a reduction in recurrent expenditures on the other. It should be supporting growth and imposing austerity at the same time.
Lawrence J. Lau 60
The Near-Term Macroeconomic Outlook: The Euro Zone Economies The Euro Zone economies are falling into recession as the
European sovereign debt crisis is allowed to fester and spread to other Euro Zone economies from Greece.
What is needed is some resolute action to reassure the World that the Euro Zone economies will do whatever it takes for the Euro to survive as a major international reserve currency.
Lawrence J. Lau 61
The Near-Term Macroeconomic Outlook: The Euro Zone Economies Stable relative exchange rates among economies can and do
enhance the international trade and investment flows among them significantly, much more so than a free trade area or a common market among them.
The introduction of the Euro as a single currency for countries in the Euro Zone is a good example—intra-Euro Zone trade tripled to approximately 3 trillion Euro (or US$4 trillion) after the introduction of the Euro in the late 1990s even though there had been no tariffs among the major countries in the Euro Zone since the 1960s.
The benefits to the major Euro Zone economies such as France and Germany of maintaining the Euro far exceed the costs of doing so.
Lawrence J. Lau 6262
Intra-Euro Zone Trade, Billions Euro,Pre-and Post the Introduction of the Euro
Intra-Euro Zone Trade, in Billions Euro
0
500
1,000
1,500
2,000
2,500
3,000
3,500
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Eu
ro b
illi
on
s
Intra-Euro Zone Total Trade
Intra-Euro Zone Exports
Intra-Euro Zone Imports
Lawrence J. Lau 63
What Caused the European Sovereign Debt Crisis? The source of the European sovereign debt crisis is the
accumulation of public debt, incurred to support a continuing series of government budget deficits, to a level that is beyond the servicing capacity of the individual country.
Moreover, it is important to make a distinction between internal debt and external debt. Internal debt is debt owed by a country to its own citizens and firms. External debt is debt owed by a country to non-nationals. Debt repayments to a country’s own citizens and firms stay in the country, not so debt repayments to non-nationals.
Lawrence J. Lau 64
What Caused the European Sovereign Debt Crisis? If the public debt were mostly internal, such as in Japan, which while
it has a public debt to GDP ratio in excess of 200%, only 5% of the public debt is held by non-nationals, the problem is manageable.
Internal debt is a little like debt within the same family. The son borrows from the father. When the father demands repayment from the son, the son goes to the mother and asks for money to repay the father. The mother asks the father for money. Father gives money to mother, mother gives money to son, and son repays the father. This completes the circle. This arrangement can continue more or less indefinitely, especially if the rate of interest is low, as long as the money stays within the family.
However, if the debt is external to the family, this recycling breaks down. Debt repayment then becomes a real burden for the family.
Lawrence J. Lau 65
What Caused the European Sovereign Debt Crisis? As long as the public debt is internal to a country, the
government can issue new debt to its citizens and firms and repay the old debt with the proceeds from the new debt. This process can continue indefinitely if the domestic citizens and firms have confidence in the government’s ability to repay, and especially if the nominal interest rate is low. (The government can also increase taxes and repay the old debt with the additional taxes collected.)
However, this process breaks down if the debt is held externally, by non-nationals. In this case, net real resources must flow out of the country in order to repay the debt.
Lawrence J. Lau 66
What Caused the European Sovereign Debt Crisis? Unfortunately, in the case of Greece, much of the debt is
external. The situation is therefore not sustainable. The other option of solving the problem through printing more
money is also not available to Greece, because it does not have the authority to issue Euros (unlike the United States, which can increase the supply of U.S. Dollars at will).
The solution for Greece is therefore limited to severe austerity or outright default (which implies exit from the Euro Zone).
It does not help that there are many speculators speculating on an eventual Greek default. The indiscriminate sale of credit default swaps (CDSs) on Greek debt, and for that matter on the debts of other member countries of the Euro Zone, to speculators who do not own the underlying bonds, exacerbated an already bad situation.
Lawrence J. Lau 67
What Caused the European Sovereign Debt Crisis? The Euro Zone authorities should step in decisively and
forcefully to maintain confidence in the Euro and Euro Zone debt. Confidence, once lost, is extremely difficult and costly to restore.
Fiscal contraction at a time of recession feeds negative expectations about the future. It is better to have a short-term fiscal expansion in capital expenditures to promote the resumption of growth, coupled with a longer-term plan for achieving fiscal balance in recurrent expenditures in the long run.
Lawrence J. Lau 68
The Near-Term Macroeconomic Outlook: The Euro Zone Economies The Greek economy accounts for less than 2.5% of the Euro
Zone GDP. It is almost immaterial to the Euro Zone if Greece exits from the Euro Zone. And some Euro Zone countries may even welcome it.
However, the costs to Greece will be much higher leaving the Euro Zone than staying. By leaving the Euro Zone, Greece will have to bring back its own currency, the drachma, which is certain to devalue sharply with respect to the Euro, resulting in a high rate of inflation in Greece. Moreover, the problem of insufficient government revenue, whether in Euro or in drachma, will persist, necessitating a severe austerity programme either way. Thus, the painful adjustment by the government cannot be avoided.
Lawrence J. Lau 6969
The Distribution of the GDP of Euro Zone in 2011
The Distribution of the GDP of Euro Zone in 2011, in Euro billions
Estonia0.2%
France21.2%
Italy16.8%
Finland2.0%
Cyprus0.2%
Belgium3.9%Austria
3.2%Spain
11.4%Slovenia
0.4%Slovak Republic
0.7%
Portugal1.8%Netherlands
6.4%Malta0.1%
Luxembourg0.5%
Ireland1.7% Greece
2.3%Germany
27.3%
Lawrence J. Lau 70
The Near-Term Macroeconomic Outlook: The Euro Zone Economies What Greece should do is to reduce its recurrent
government expenditures significantly, but at the same time undertake some capital projects, possibly with the support of other Euro Zone economies such as France and Germany, so as to maintain some economic growth and prevent unemployment from becoming too high. It must promote growth and impose austerity at the same time.
Lawrence J. Lau 71
Concluding Remarks The centre of gravity of the World economy is gradually
shifting to Asia (East Asia and South Asia) from North America and Europe. The shift is still on-going.
However, if current trends continue, it will probably take between 15 and 20 years before Chinese real GDP can catch up to the level of the United States real GDP. In the meantime, the U.S. economy will still be the largest in the World.
It will take another 30 years, until around 2060, for China to reach the same level of real GDP per capita as the United States (bear in mind that in the meantime, the U.S. economy will also continue to grow, albeit at rates significantly lower than those of the Chinese economy and that the Chinese population is likely to plateau in 2045).
Lawrence J. Lau 72
Concluding Remarks The long-term outlook for the U.S. economy is really quite
positive. The innovative capacity of the U.S. economy is unmatched in the World—think of the internet, the micro-processor, the i-phone and the i-pad. The U.S. is also likely to become a net energy exporter within the next decade, taking advantage of its huge reserves of shale gas and advanced fracking technology.
At the present time, the World economy desperately needs a healthy U.S. economy. It is not clear whether there will be a Quantitative Easing III (QE-III), but if there is one, it will have to take a very different form from both QE-I and QE-II. The whole World wishes the Federal Reserve Board every success!