The US economy’s strong performance in 2023, along with the challenges faced by China’s economy, suggests that China’s GDP overtaking the US is less likely.
US gross domestic product rose 6.3% in nominal terms, compared to China’s 4.6% gain in 2023. The US economy is emerging from the pandemic period in a better place than China’s.
In the beginning of 2023, the US was widely tipped to fall into a recession as the Federal Reserve jacked up interest rates to combat an inflation scourge not seen in decades. On the other hand, China was expected to experience a rip-roaring recovery as it reopened its economy fully to commerce after the Covid-19 lockdown.
However, this week’s GDP data showed that the US economy ended the year with a bang, growing 3.3% in real, inflation-adjusted terms in the fourth quarter after expanding 4.9% in the third.
China’s real estate crisis
China is struggling under the weight of a years-long real estate bust and its worst streak of deflation in some 25 years. Besides, country’s exports — once a critical pillar of growth — declined in 2023, and unemployment among young people has soared. The local governments are also saddled with too much debt.
While Xi Jinping government claimed the economy expanded by 5.2% in 2023, there are suspicions that isn’t a true picture of what’s going on.
To be sure, nominal GDP isn’t the only way to measure the size of a country’s economy.
Economists also use something called purchasing power parity, which tries to take account of differences in prices between countries for the same good or service. On that basis, as calculated by Bloomberg Economics, China overtook the US around 2016.
But many observers don’t think that’s the best way to measure economic heft on the world stage. For that, nominal GDP is seen as a better guide.
China’s authoritarian rule issue
Peterson Institute for International Economics President Adam Posen told Bloomberg news agency that Chinese President Xi Jinping has greatly compounded the country’s underlying economic weaknesses by his arbitrary and authoritarian exercise of power throughout the economy and society.
Jinping’s rule has spooked households and small businesses into hoarding cash, because they just don’t know what’s coming next, Posen said.
On the other hand, Posen expected that the US could be on the cusp of a pickup in productivity growth that will allow the economy to grow faster without generating inflation.
However, the final act in the Fed’s campaign to return US inflation to its 2% target has yet to be written.
