World Economy Review

The International Monetary Fund (IMF) recently made a bold prediction that China will exceed the United States and become the world`s largest economy as early as 2016 in terms of purchasing power parity. This prediction seems to add new evidence to the popular statements made by some western analysts who believe China`s rise is the main cause for the decline of the United States.
"Is the United States really on its wane?" "Will China`s rise mainly lead to the decline of the United States?" Experts on international issues in Beijing pointed out that the proposition and judgment regarding the decline of the United States is controversial. Even if the United States is coming down, China`s rise is not the main reason.
The IMF`s prediction shows that according to the current growth rate, China`s economic size will reach 19 trillion U.S. dollars in 2016 in terms of purchasing power parity while the U.S. economic size will reach 18.8 trillion U.S. dollars in 2016. Therefore, China will exceed the United States and become the world`s largest economy.
"We will reach different conclusions from different angles regarding the proposition of the decline of the United States. I think, more specifically, U.S. power is now in the state of absolute growth and relative decline," said Ni Feng, deputy director of the Institute of American Studies under the Chinese Academy of Social Sciences.
Ni said that the United States showed a significant economic growth over the past decade, moving ahead of other developed economies such as the European Union and Japan, while the faster development of emerging economies indeed has brought the phenomenon of the relative decline of the United States.
However, Ni also stressed that the relative decline of the United States is mainly embodied in the economic field. The downward trend in fields such as politics, military affairs and science and technology is not obvious, and its performance in some fields has even become more outstanding.
Data shows that despite the severe economic downturns caused by the collapse of the Internet bubble in 2001 and by the international financial crisis from 2008 through 2009, the GDP of the United States, calculated at constant prices, was up 21 percent during a period from 2000 to 2010. Some economic indicators of the United States have dropped compared with other countries in the world. The proportion of U.S. GDP to the total GDP of the 19 other G20 countries stood at 61 percent in 2000 and dropped to 42 percent in 2010. The U.S. GDP was more than eight times that of China in 2000 and was less than three times that of China in 2010. "The U.S. GDP share of the world`s total was once more than 50 percent after the second world war and stands at around 25 percent today. The strength of the United States by GDP has indeed comparatively declined, causing the United States to give up "the dominance of global economic affairs" and seek "multilateral cooperation" to deal with international economic issues."
The G20 including members such as the United States, Japan, China and India has become a major platform for managing the world economy. During the reforms of the World Bank in April 2010, developed countries shifted more than 3 percentage points of voting rights to developing countries. In October 2010, the IMF passed a reform plan transferring 6 percentage points of voting rights to underrepresented countries including emerging countries. With the continuous development of China-U.S. ties and in-depth changes in the international situation, the mechanisms such as the China-U.S. strategic and economic dialogue have emerged.
Yang Bin, an economist at the Chinese Academy of Social Sciences, said that the international financial crisis and the fall in the economic influence of the United States can be considered a reflection of the "decline" for the United States. However, the key reason behind the "decline" is not the "rise of other countries" but fundamental defects in its economic system and structure.
Yang said that the United States currently features a growing scale of financial monopoly capital, the deepening of economic "financialization," "virtualization" and "hollowing out," as well as the increasing share of speculation in economic activities, the excessive concentration of wealth to financial oligarchs and continued high unemployment rates. "The international financial crisis is just a warning. If the United States does not change its neo-liberal economic system and development mode, the deterioration in its economic strength will continue," Yang said.
The U.S. economy has been faced with increasingly deteriorating problems of high fiscal deficits, high trade deficits, and high debts for a long time. The United States has been the world`s largest debtor nation since the 1980s, but has managed to maintain economic growth by overusing the dollar hegemony, running up huge debts, and printing bills beyond reasonable bounds, which led to a lopsided financial development and a declining manufacturing industry. Manufacturing, the principal part of a real economy, only accounts for about 10 percent of U.S. GDP and corporate profits. By contrast, service industries, mainly consisting of the financial services industry, account for around 80 percent of the country`s GDP. The financial and real estate services industries generate over 40 percent of U.S. corporate profits.
The "financialization" of the U.S. economy is in fact "virtualization" and "parasitism." The value of the dollar against other major currencies has dropped significantly. When the dollar falls below a psychologically important level and loses its privileged status, foreign capital will withdraw from the United States quickly, leaving the U.S. economy at risk of collapse.
"The United States` economic power and influence keep falling due to its own perennial problems and the rapid development of emerging economies. While GDP is a good measure of the size of the economy, it cannot reflect the comprehensive national strength of a country. The United States is not really in decline if we fully consider its innovative strength, amount of core technologies, military strength, and other aspects," said Zhu Feng, a professor at the School of International Studies under Peking University.
U.S. military spending has been almost as much as the combined spending of all other countries in the world for many years. According to the statistics recently published by the Stockholm International Peace Research Institute, U.S. military spending rose nearly 3 percent to 698 billion U.S. dollars in 2010, more than that of any other country in the world. Worldwide military spending increased by 20.6 billion U.S. dollars last year, and the United States alone accounted for 19.6 billion U.S. dollars of the increase.
Thanks to its enormous economic size and large lead in business and technology, the United States topped world competitiveness rankings over the past many years. According to statistics from the World Intellectual Property Organization, the United States remained the world`s largest international patent applicant with 44,855 patent applications filed in 2010.
The "China`s National Competitiveness Report" blue book released by the Chinese Academy of Social Sciences in 2010 pointed out that the United States still has a relatively large overall competitive advantage, and its advantages in aspects such as global connections and the human resource structure are even more outstanding.
The blue book said that in the context of globalization, China`s development took the road of "inclusive growth" and needs a fair, cooperative and open environment. It is inadvisable to equate the prosperousness of China`s economy and the enhancement of China`s competitiveness with the so-called "China threat theory."
Zhu said that it will not bring substantive changes in the international security system even if China`s GDP ranks first worldwide. Measuring the international security system needs to consider more on various aspects such as alliance, overseas troops, delivery capacity of military power, and the breadth and density of global security partners. China currently has no capacity and desire to change the existing international security system.
"China will unswervingly follow the path of peaceful development and continue to develop through striving for a peaceful international environment, and will also safeguard and promote world peace with its own development," said President Hu Jintao during his visit to the United States at the beginning of 2011.

Economy of the United States

US GDP growth in the first quarter of 2011 slowed to an annual rate of 1.8 percent, compared to a rate of 3.1 percent in fourth quarter 2010 and 3.7 percent in first quarter 2010. It was slightly below the consensus estimate. The growth rate of 1.8 percent reflects positive contributions from personal consumption, private inventory investment, exports, and non-residential fixed investment. Drags on the growth rate included federal government spending, local government spending, and imports.
The Bureau of Economic Analysis said in summary: “The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE [personal consumption expenditure], a larger decrease in federal government spending, and decelerations in non-residential fixed investment and in exports that were partly offset by a sharp upturn in private inventory investment.”
In late 2010, economists were more optimistic about 2011`s growth rate due to Obama`s tax compromise with the Republicans and the monetary support frpm QE2. However, the combination of lower-than-expected economic data, global turmoil, and worries about the budget deficit have led economists to lower their expectations and led to the 2011 first quarter growth rate to decelerate to 1.8 percent.
U.S. industrial production rose a solid 0.8% in March, with broad-based gains across sectors, the Federal Reserve reported. It was the fifth straight gain in factory output, as manufacturing continues to lead the economy. The increase was a modest upside surprise as economists were expecting a 0.6% gain. Read our comprehensive economic calendar including forecasts.
In the first quarter, industrial output rose at a 6% annual rate, faster than the 3.2% rate in the final three months of 2010. Most indicators of the manufacturing economy are at lofty levels. On Wednesday, the Fed`s own Beige Book survey found that manufacturing was leading the economic expansion. A separate New York-area gauge rose in April to the best level in a year. See story on Empire State manufacturing survey. Industrial output is up 5.9% compared with a year ago.
Capacity utilization – a gauge of slack in the economy – jumped to 77.4% in March from 76.9% in February. This is the highest level since July 2008 but still below the average rate of 80.4% from 1972 through 2010. The Fed thinks that this space capacity is going to keep inflation subdued.
A drop in U.S. imports from China and elsewhere helped narrow the trade deficit in February, though analysts said the drop might signal that the economy is slowing.
U.S. exports fell as well, though the decline in imports was more pronounced and pushed the trade deficit to $45.8 billion from $47 billion the month before, the Commerce Department reported.
The monthly trade shortfall with China fell sharply, to $18.8 billion from $23.3 billion the month before. That was largely because of a decline in U.S. imports. Exports to China rose slightly.
Trade and other data are being watched closely for evidence that trade patterns in the two countries are becoming more balanced. China posted its first quarterly trade deficit in seven years in the first three months of 2011, though that was largely driven by higher commodity prices.
The U.S. data for February are disappointing for the Obama administration`s effort to boost American exports. U.S. sales abroad in February fell $2.4 billion to $165 billion.
Accounting for inflation, the decline in exports was even larger, Barclays Capital reported in a research note. Barclays projected that the U.S. trade deficit would widen in the wake of higher oil prices and would subtract from overall U.S. growth.

Economy of Eurozone

In February 2011 compared with January 2011, seasonally adjusted industrial production grew by 0.4% in the euro area (EA17) and by 0.2% in the EU27. In January production rose by 0.2% and 0.5% respectively. In February 2011 compared with February 2010, industrial production grew by 7.3% in the euro area and by 7.0% in the EU27.
In February 2011 compared with January 2011, production of non-durable consumer goods grew by 0.9% in the euro area and by 0.7% in the EU27. Capital goods rose by 0.6% and 0.3% respectively. Intermediate goods increased by 0.5% in the euro area and by 0.4% in the EU27. Durable consumer goods gained 0.4% in the euro area, but fell by 0.3% in the EU27. Production of energy declined by 0.6% and 0.8% respectively.
Among the Member States for which data are available, industrial production rose in thirteen and fell in ten. The highest increases were registered in Portugal and Slovenia (both +1.7%), Germany, Italy and Poland (all +1.4%), and the largest decreases in Malta (-5.8%), Denmark (-2.7%) and Ireland (-2.5%).
In February 2011 compared with February 2010, production of capital goods grew by 13.8% in the euro area and by 13.7% in the EU27. Intermediate goods increased by 10.1% in both zones. Durable consumer goods rose by 4.3% in the euro area and by 1.5% in the EU27. Non-durable consumer goods gained 2.5% and 2.8% respectively. Production of energy fell by 3.3% in the euro area and by 2.8% in the EU27.
Industrial production rose in all the Member States for which data are available, except Greece (-4.6%) and Ireland (-0.4%). The highest increases were registered in Estonia (+31.3%), Sweden (+15.9%), Bulgaria (+15.2%), Lithuania (+13.7%) and Germany (+13.4%), and the smallest in the Netherlands (+0.4%) and Denmark (+0.5%).
The first estimate for the euro area (EA17) trade balance with the rest of the world in February 2011 gave a 1.5 bn euro deficit, compared with +1.4 bn in February 2010. The January 2011 balance was -15.6 bn, compared with-10.4 bn in January 2010. In February 2011 compared with January 2011, seasonally adjusted exports rose by 1.6% and imports by 1.0%.
The first estimate for the February 2011 extra-EU27 trade balance was a 9.6 bn euro deficit, compared with -7.5 bn in February 2010. In January 2011 the balance was -30.2 bn, compared with -23.4 bn in January 2010. In February 2011 compared with January 2011, seasonally adjusted exports rose by 0.7%, while imports fell by 0.2%.
Euro area annual inflation is expected to be 2.8% in April 2011 according to a flash estimate issued by Eurostat, the statistical office of the European Union. Euro area annual inflation was 2.7% in March 2011, up from 2.4% in February. A year earlier the rate was 1.6%. Monthly inflation was 1.4% in March 2011. EU3 annual inflation was 3.1% in March 2011, up from 2.9% in February. A year earlier the rate was 2.0%. Monthly inflation was 1.1% in March 2011.
The euro area (EA17) seasonally-adjusted unemployment rate was 9.9% in March 2011, unchanged compared with February. It was 10.1% in March 2010. The EU27 unemployment rate was 9.5% in March 2011, also unchanged compared with February. It was 9.7% in March 2010.
Eurostat estimates that 22.828 million men and women in the EU27, of whom 15.596 million were in the euro area, were unemployed in March 2011. Compared with February 2011, the number of persons unemployed fell by 10 000 in the EU27 and by 9 000 in the euro area. Compared with March 2010, unemployment decreased by 291 000 in the EU27 and by 260 000 in the euro area.

Economy of Japan

Japan`s gross domestic product in January-March is expected to have posted a second consecutive quarter-on-quarter contraction, down a real 0.4% on quarter, or an annualized 1.6%, hit by the March 11 earthquake disaster, according to the median forecast of economists surveyed by Market News International. In the final quarter of 2010, the economy contracted 0.3% q/q, or an annualized 1.3% on what was believed, until just before the disaster, to be a temporary dip in consumer spending and slower business investment.
Japan`s industrial production plummeted a record 15.3 percent from the previous month in March on a seasonally adjusted basis, the Economy, Trade and Industry Ministry said in a preliminary report.
The record decline in the recording period was due to the March 11 twin disasters that destroyed infrastructures, damaged production facilities and severely disrupted key supply chains, the government said.
March`s figure far exceeded median economists` expectations for an 11.4 percent drop and the index stood at 82.9 against the base of 100 for 2005.
Industrial shipments plummeted 14.3 percent to 85.3 and industrial inventories dropped 4.3 percent to 97.6, the government data showed.
Japan`s trade surplus in March reached 196.5 billion yen ($2.37 billion), down 78.9 percent but still managing to stay in the black for the second straight month, the finance ministry said. Exports in March fell 2.2 percent to 5.87 trillion yen, falling for the first time in 16 months due to reduced shipments of automobiles, it said. It came slightly below a 2.0 percent decline expected in a joint poll by Dow Jones and the Nikkei.
The fall was led by vehicle exports, which contracted 27.8 percent, the ministry said, after Japan`s leading automakers were forced to halt production amid broken supply chains and power shortages.
March Japanese imports rose for the 15th straight month, increasing 11.9 percent to 5.67 trillion yen, on surging prices of oil and iron ore, the ministry said. The value of oil imports rose 14.8 percent. The value of iron ore imports soared 74.9 percent. Coal imports also rose 39.4 percent.
Japan`s core consumer price index rose 0.2% in March, while the unemployment rate remained steady at 4.6%, Japan`s Statistics Bureau said Thursday. The gain in the core CPI, which excludes food and energy prices, marked the first rise since March 2009, according to CNBC. The inflation reading, which matched the consensus expectation in Dow Jones Newswires survey, compared with a 0.3% drop in February. The core CPI was down 0.1% from March 2010.
The jobless rate, meanwhile, was unchanged, beating the Dow Jones Newswires survey`s 4.8% forecast, and remaining at the lowest level since February 2009. However, the employment reading excluded three prefectures worst hit buy the March 11 earthquake and tsunami. In separate data, household spending data were weaker than expected, with spending by households of two or more people down an inflation-adjusted 8.5% from a year earlier, compared with a forecast drop of 6.4%.

Economy of Russia

In the January-March quarter of 2011 Russia`s gross domestic product (not seasonally adjusted) growth slowed down on the quarter to 1.3% against 2.8% in 4Q 2010. The Ministry for Economic Development showed these data in its monitoring report (released on Monday) on the current situation in the national economy in 1Q. Russia`s GDP rose 4.5% y-o-y in 1Q.
As the report notes, GDP growth was impacted by substantial weakening of investment demand this January, and although February and March recorded stronger investment demand, overall in January-March investments made an extremely negative contribution to economic expansion. Also, dynamics of net exports had a considerably negative effect amid fast-growing demand for imports and a slowdown of exports. In the first quarter of 2011 GDP grew primarily on the back of higher consumer spending and more aggressive accumulation of inventories.
On the production side, in January-March 2011 a positive contribution to GDP was made by industrial output, agriculture, trade, while the construction sector produced a negative impact.