whats-behind-the-us-gdp-slide-and-why-is-china-different

Context: The United States contracted by 33 per cent in the second quarter making it the sharpest GDP decline in its history. While China’s 3.2 per cent year-on-year GDP growth announced recently showed a clear recovery in consumption trends.

Reasons behind USA’s fall

  • There is a big fall in consumption in the USA which is the biggest component of American GDP that accounts for almost 70 per cent of the economy. 
  • Investments and exports down: Investments in buildings, equipment and intellectual property which drive USA’s big manufacturing sector also fell at an annual rate of 49 per cent while exports dropped 64 per cent. 
  • Sharp jump in COVID-19 cases: After many states lifted their lockdown orders in April and May, COVID-19 cases began a sharp climb in June, with the result that rebounding economic activity fell down.

Similarities between economies of USA and China

  • Driven by consumption: Consumption accounts for over two-thirds of US GDP and more than one-half that of China.
  • Boosting consumption in their relief packages: 
    • Both countries focussed on boosting consumption by attempting to put money in the hands of consumers. 
    • The US did directly through the ‘cheque in the mail’ and the Payroll Protection programmes. 
    • China did it through a pre-paid voucher scheme for specific products and a few other policies.

Contrast between economic recovery trend of both economies

  • The V-shaped recovery: China was the first country to face the Coronavirus crisis and to progressively restart its economy. China’s GDP growth rate showed a sharp fall followed by sharp recovery which was unexpected. So China has avoided a technical recession (which is signified by two consecutive quarters of negative growth) while the US is clearly headed for a recession.
  • The services sector and consumption trends: While both economies rely on the service sector, continuing mobility restrictions have significantly hampered the return of such jobs in the US, especially in the catering, travel and hospitality industries that account for a bulk of the urban jobs. 
    • In the USA there was an initial delay in responding to the spread of the disease, and uncertain state government policies prevailed.
  • Difference in recovery packages
    • US package bigger than China: According to the IMF, China’s COVID-19 related support policies, including spending, loans and guarantees, amounted to just 2.5 percent of GDP, it is a much higher 11 per cent for the US. 
    • China’s focus on consumption recovery: Sales in China’s online retail channels, which account for 30 per cent of total sales, are back in while traffic to shopping malls is reaching normal level.
    • USA’s focus on interest rates: Much of its policy push focussed on paring interest rates, increasing borrowing, and strengthening government purchasing of debt. 
      • Due to this, the corporates and the stock markets are the largest beneficiaries of these policies.

Takeaways for India

  • Increasing cases: In India, the case count is surging, even as the government is progressively easing up restrictions. 
  • No chances of consumption recovery: While the share of consumption to GDP, at 57 per cent in India, is closer to that of China, uncertainties are preventing people from spending despite unlocking.
  • India’s recovery package not boosting consumption:  In the US and China,  the govts. put money directly into the hands of the people while in India, much of the Rs 20 lakh crore Covid-19 economic package has been liquidity driven, with little burden on the Central exchequer. 
    • It has been primarily focused on pushing banks to extend credit on the back of government guarantees to sectors that include small businesses, non-banking financial companies, microfinance institutions and housing finance companies. 

The big takeaway for countries such as India from the divergent GDP growth trends of the US and China is that the government’s effectiveness in getting an economy back on track is dependent on its success in controlling the spread of the virus. The recovery in economic activity also depends on the quality of policy support.

Image Source: Global Times