Asian versus western economies in post-Covid era
FOR decades economies in Asia have seen constant and consistent economic growth. It has been the centre of rapid and at times spectacular economic activity and has been a major contributor in reducing issues of poverty and hunger in this region. China, in particular has been the major actor in dominating the global stage and addressed these two issues of vital importance with success. While we expect China’s long-term growth to continue outpacing growth in advanced economies, risks are tilted to the downside. Domestically, the country’s property downturn will not only affect industrial activity, but also erode households’ wealth levels and, therefore, exacerbate downward pressure on domestic demand. Externally, the rising tension between Western nations and China could severely damage the growth outlook for China’s high-tech sectors.
These factors will weigh on China’s already falling aggregate rate of return on capital. China’s GDP is forecast to rebound to above 8% in 2023-2024, as the government relaxes its “dynamic zero-COVID” strategy. Industrial production growth has slowed down a bit in 2023 as external demand has moderated. China’s aging population and the slowdown in capital accumulation will lead to further growth deceleration in the coming decade. The downturn of the housing sector is likely to last for years, affecting China’s medium- to long-term growth through several fundamental channels. Investment growth in manufacturing will rally in industries where businesses consolidate as well as those with strong state support. While the energy crunch in the past two years has resulted in increasing reliance on coal, the government is not retracting its long-term decarbonization plan.
Seen in the backdrop of economic outlook for the United States for 2023-2024 which has deteriorated under the weight of high inflation rates and rapid monetary tightening, the economic prospects for China in future seem to be promising and bright. Falling consumer and business confidence, softening consumption and investment and geopolitics-induced energy shocks in USA are likely to tip the economy into recession around the turn of the year. However, the recession is projected to be short and mild, amid a strong labour market and relatively healthy consumer and business balance sheets. Beyond 2024, the US economy is likely to return to its slowing trend growth rate trajectory.
Key risks around the longer-term US outlook are related to geopolitical frictions, environmental challenges, labour markets and inflation. Following a large drop in US gross GDP in 2020 due to the impact of the COVID-19 pandemic, the US economy experienced rapid growth for much of 2021. However, in 2022 this growth momentum began to sputter. Inflation is likely to remain above pre-pandemic trends for several years, if not longer. The US economy is currently grappling with a wave of supply-chain issues, driven by a confluence of demand and supply factors that are not expected to resolve quickly. Interest rates are not likely to fall until 2024 or later. As a function of inflation, the Federal Reserve has rapidly tightened monetary policy and will continue to raise rates to curb and rein in inflation.
Following expectation of near-zero growth in 2023, real GDP growth is expected to recover in 2024. However, over the next decade, growth will be somewhat muted relative to pre-pandemic trends. Disruptions brought about from the pandemic will have lasting effects on the drivers of US growth ahead and there will be smaller contributions from labour, reflecting an aging demographic scenario. Nonetheless, acceleration of digital transformation resulting from the pandemic and current investment in infrastructure is likely to result in elevated total factor productivity (TFP) growth over the next decade.
Russia on the other hand, according to some thinkers, with Western sanctions that followed the invasion of Ukraine and which have made it difficult to import what it needs, is witnessing shortage of items of daily use. Foreign investors are staying away, thousands of the country’s elite have emigrated and the price of its main export (oil and gas) has sunk. Ukraine war has isolated Russia to some extent. The great shut-off of its economy will accelerate in 2023, as Moscow moves closer to the North Korean economic model. The invasion of Ukraine has inflicted damage on Russia, which depends heavily on the export of oil and gas. Though high prices in early 2022 helped the country, the rest of the world quickly adjusted, moving around supplies and, in some cases like the United States, exporting more.
The price of Russia’s crude oil has already fallen 40% from its March 2022 peak and Russia could now lack the resources to cushion the blow of the recession on its population. As a result, the Russian economy will take a hit. In October 2021, the International Monetary Fund predicted Russia’s economy would grow 2% in 2023. Now, the agency sees the country’s GDP falling by 2.4% after shrinking 3% in 2022. Based on the rouble’s 2021 exchange rate, that translates into some $200 billion in lost GDP. That will add pain to already worsening finances. Spending jumped more than 20% in 2022 mostly because of an increase in defence outlays estimated at some $53 billion by Bank of Finland economists. The Russian government had to tap rainy-day fund to make up for the first budget deficit in years. Keeping the Rouble convertible into other currencies will become harder in future.
Putin has already tightened his and his government’s control of the economy, demanding to sign off on the sale of assets by Western companies in the banking or energy sector. State-owned companies or banks, or Kremlin-friendly oligarchs, such as nickel magnate Vladimir Potanin, have already bought banking or industrial assets very cheap and the trend will only intensify. Far from the scrutiny of foreign investors, Russian business will be free to take to new levels the wide-spread corruption that has held back the economy for years and state will probably complete its task of devising a plan where nobody can replace the current regime and it will sell oil and spend Roubles as it deems fit.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration.
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