China vs. United States of America - The Real Relative Growth Story:

Thought for the day

China vs. United States of America
The Real Relative Growth Story

8 May 2024

The US is no longer the biggest economic power in the world, or the primary engine of global growth. China's extraordinary economic growth over the past 4 decades, at an average rate four times that of the US (three times over the last decade), has radically changed the balance of power in the world.

The most realistic metric for comparing GDP in different countries (recommended by the IMF, the CIA and many others) is that of Purchasing Power Parity.

On this basis the Chinese economy is already almost 19% (IMF figures) bigger than that of the US. Add in the fact that China's informal economy is significantly larger than that of the US (approximately 13% of GDP as against 7% for the US); and that it uses a 8 year old base year in its national accounts; and it is likely that China's GDP is currently over 38% bigger than that of the US.

Project forward on the basis of the average relative growth of the last 5-years and it seems likely that China will be closing in on a GDP figure roughly twice that of the US by 2033 - in less than a decade.

Clearly GDP size is not entirely correlated with economic and political power. But a China of 1.4bn people and a GDP double the size of its closest rival, puts the US in a very different position to that it has experienced for well over a century.

The big question remains, will China's growth slow down in the near future to levels more like that of the US, or will it continue to outpace the US until it is a very much larger economic entity? The first point to note is that there are many other indications of China's new primacy in the world. First and most important, China has dramatically overtaken the US as the primary engine of global growth.

China: The Primary Engine of Global Growth
China’s % share of Global GDP growth over the past 40 years

China vs. United States of America - The Real Relative Growth Story

* GDP in Purchasing Power Parity terms with added estimates for the size of the informal economy and adjustments for out-of-date GDP base year data.

Over the last decade China produced an astonishing 31.2% of all global economic growth, as against 9.6% from the US

A second indication of China's rapid rise to global prominence. When China entered the World Trade Organisation in December 2001, the primary trading partner for most countries was the US. Just 20 years later, China had overtaken the US to become the biggest trading partner of most of the significant nations of the world. A third indication: China has also become the home of the largest number of the most valuable companies in the world on one measure. Fortune magazines announced in 2021 that its Global 500 listing of top companies is now "More Chinese than American".

Predictions of a significant slowdown in China's rate of growth have been common for almost as long as China has been outpacing western developed markets. China's GDP growth rate has indeed slowed down over its 4 decades of extraordinary growth. But so has the rate of growth in most developed western nations, to the point where most are expected to grow annually by 1.5% - 2% as they try to tame inflation, cope with war in Europe, and adjust to the realities of life in the post covid world. In contrast, many economists expect China growth to slow to 3.5% - 5.0% annually, between 2024 and 2030. Very few expect China's growth to be less than twice that of the US over the next few years. As long as this kind of GDP growth differential persists, China's economy will be far larger than that of the US by the end of the decade.