US debt deal will hold back its economy
Updated: 2011-08-03 11:26
By John Ross (chinadaily.com.cn)
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Even more seriously, as housing construction is likely to remain depressed, US non-residential investment is only 9.9 percent of US GDP – slightly over one tenth the share of consumption in the US economy. Therefore US non-residential fixed investment would have to rise by almost ten percent to compensate for even a one percent reduction in the increase of consumption caused by the debt deal. There is no indication such a scale of investment increases will occur spontaneously.
But simultaneously the US administration rejects measures to increase government investment, which has marginally fallen as a percentage of GDP since the peak of the last business cycle. Nor does it project measures to increase private investment.
With the increase in consumption constrained by the debt deal, and no sufficiently large boost likely to come from net exports or investment, relatively slow US growth will continue.
What are the implications of this for China?
First, slow US growth means weakness in what is still China's second most important export market after the European Union.
Second, as the debt agreement rules out fiscal tools to expand the US economy, pressure will probably mount for 'QE3', that is a new round of quantitative easing. This would increase inflationary pressure in China and elsewhere.
Third, slow US growth, coupled with continued expansion in China, will bring forward the date at which China overtakes the United States to become the world's largest economy – this is now likely to be in five to seven years compared to the ten-year period that was previously projected.
The consequences of the debt deal will therefore have effects reaching far wider than the US itself.
John Ross is Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. From 2000 to 2008, he was then London mayor Ken Livingstone's Policy Director of Economic and Business Policy. The views expressed here do not necessarily reflect those of the China Daily website.