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Tuesday, May 18, 2021

Explained: What’s behind US GDP slide and why is China different

The worrying news for the US is what economists seem to be widely projecting -- that the scale of this fall in the first quarter will be dwarfed by that in the second.

Written by Anil Sasi
Updated: July 31, 2020 7:38:51 pm
Explained: What's behind US GDP slide and why is China different Investments in buildings, equipment and intellectual property — big manufacturing sector drivers — also fell at an annual rate of 49 per cent while exports plunged 64 per cent. (AP Photo)

The United States contracted by 33 per cent in the second quarter, or a near 10 per cent quarter-over-quarter decline— making it the sharpest GDP decline in history of the world’s largest economy. This is in sharp contrast to GDP data released by China less than a fortnight ago, where growth in the world’s second-largest economy has swung back sharply into the black in the April-June quarter.

Discounting for the fact that China was first off the block and there was a lag of around a quarter in the transmission trends of the pandemic across the two countries, 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.

What explains the US GDP slide?

Economists decoding the slide in the US GDP numbers point to a precipitous fall in consumption — the biggest component of American GDP that accounts for almost 70 per cent of the economy. Spending on goods and services is estimated to have fallen at a seasonally adjusted annualised rate of 35 per cent in the second quarter, which alone lops off 25 percentage points from headline growth, according to a research note by Ian Shepherdson, chief economist at the UK-based Pantheon Macroeconomics.

Investments in buildings, equipment and intellectual property — big manufacturing sector drivers — also fell at an annual rate of 49 per cent while exports plunged 64 per cent. The worrying news for the US is what economists seem to be widely projecting — that the scale of this fall in the first quarter will be dwarfed by that in the second. And much of this pessimism can be attributed to the sharp surge in COVID-19 cases, particularly in the southern and southwestern US states, that has pushed the death tally above 150,000 and the growth in daily cases above 60,000 – triple what it was in early June. 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 sputtered.

Why do the world’s top two economies offer contrasting trends?

There are inherent similarities in the two countries. Both the US and China are driven by consumption — over two-thirds of US GDP and more than one-half that of China.

In their relief packages too, both countries focussed on boosting consumption by attempting to put money in the hands of consumers — the US managing that directly through the ‘cheque in the mail’ and the Payroll Protection programmes. China, through a pre-paid voucher scheme for specific products and a few other policies.

But China’s GDP growth showed a sharply divergent trend, swinging back sharply into the black in the April-June quarter, driven by a bounceback in manufacturing output and a public spending boost. While China was the first country to brace the Covid-19 storm and to progressively restart its economy, the V-shaped recovery – a sharp fall followed by an equally sharp recovery — was something totally unexpected, which ensured that China effectively sidestepped a technical recession (which is signified by two consecutive quarters of negative growth) while the US is clearly headed for a recession if the third-quarter projections are anything to go by.

So, what is the key differentiator between the two consumption-led economies?

Other than the quarterly lag in the transmission dynamics, the big differentiator is with respect to the services sector and consumption trends. While both economies rely on the service sector for a range of value-additions and output that contribute to their respective GDP, 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. Such restrictions in the US have been geographically more widespread and longer-term, given the initial delay in responding to the spread of the disease, and fickle state government policies.

According to the IMF, while China’s COVID-19 related support policies, including spending, loans and guarantees, amounted to just 2.5 per cent of GDP, it is a much higher 11 per cent for the US. But other than the direct benefit transfer to consumer and employees in the US, much of its policy push focussed on paring interest rates, increasing borrowing, and strengthening government purchasing of debt. Much of this has either ended up improving corporate bottom lines or ended up boosting the stock markets, which appear to be the largest beneficiaries of these policies.

China’s 3.2 per cent year-on-year GDP growth announced by China’s National Bureau of Statistics on July 22 showed a clear recovery in consumption trends, something that is evidently missing in the US. Sales in China’s online retail channels, which account for 30 per cent of total sales, are back in positive territory on an annual basis, while traffic to shopping malls has inched up to about 70 per cent of normal levels. Smartphone sales have seen a V-shaped recovery and demand for tech products has broadly improved, according to Morgan Stanley’s Asia technology analyst, Shawn Kim.

What are the takeaways for India?

In India, like in the US, the case count is surging, even as the government is progressively easing up restrictions. Two days after the Union Home Ministry announced further relaxations in the lockdown guidelines, including opening up gyms, India recorded the biggest jump in the daily case count at over 55,000.

While the share of consumption to GDP, at 57 per cent in India, is closer to that of China, the trend of normalisation of consumption is akin to what is being experienced in the US — uncertainties preventing people from upping their spends beyond essentials, the progressive unlockdowns notwithstanding.

India’s recovery could have another problem. Unlike in China and the US – where the efforts to put money directly into the hands of the people — in India, much of the Rs 20 lakh crore Covid-19 economic package announced by Prime Minister Narendra Modi on May 12 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. A consumption boost in India’s recovery is practically ruled out.

With most economic activities losing two months of output and subsequent localised lockdowns being announced by states in the wake of the surge in caseload, the recovery process looks like it would be an extended one.

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