U.S. Still the Dog Wagging Tail of World Economy as China Slows

By Simon Kennedy

Photographer: Andrew Harrer/Bloomberg

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The world economy’s twin giants are exerting conflicting pressures.
As U.S. growth accelerated in the second quarter to the fastest rate since 2011, China’s economy waned, with manufacturing and lending data pointing to a weakening in activity.
A resurgent U.S. and retreating China is the reversal of a trend that dominated in the wake of the financial crisis. Economists at JPMorgan Chase & Co. say it is set to endure.
While they predict the U.S. will sustain growth of 3 percent in the current quarter and into next year, they see Chinese expansion slipping below the
pace of about 7.5 percent, the average of the past eight quarters and the rate which Premier Li Keqiang has set as a growth target for this year.
So where does that leave the rest of the world? JPMorgan economists bet the U.S. drag will prove more powerful than that of China.
“The U.S. is not the tail that wags the dog, but is more often than not the dog that wags the tail,” said Joseph Lupton, senior international economist at JPMorgan in New York. “It’s a big economy, it’s a big domestic-demand engine that drives trade flows.”
Lupton and colleagues estimate a 1 percentage point change in U.S. demand alters gross domestic product elsewhere by 0.8 point. That’s about twice the impact of a similarly sized shift in China.

Spillover Effect

On developed economies, the U.S. spillover would be about 0.9 point, four times the impact of China, Lupton and colleagues wrote in a Sept. 26 report to clients. On emerging markets, the U.S.’s effect would be 0.7 percent, the same as China’s.
“Importantly, the benefits of stronger U.S. growth are felt across the globe while the spillover from a China slowdown is concentrated in other emerging market economies,” the JPMorgan economists said.
When gauging international effects from the two economic powerhouses, they identified two developments to watch.
Firstly, an upturn in U.S. spending on capital equipment should offset the effect of some of China’s slowdown on emerging nations. Such spending is on track to grow by double digits again this quarter, helping out the likes of Taiwan and Singapore.
Secondly, global inflation as low as 1 percent in the current quarter, partly fostered by a drop in Chinese commodity imports, should help boost purchasing power, underpinning consumer demand.
“If we are right, the realization of these developments will confirm that there remains a solid underlying base for global goods demand even as Chinese growth remains sluggish,” said JPMorgan.