Source: GT    Published: 2022-1-5

Editor's Note:
2023 marks the first year to comprehensively implement the spirit of the 20th National Congress of the Communist Party of China (CPC). At the annual Central Economic Work Conference held in Beijing on December 15 and 16, 2022, Xi Jinping, general secretary of the Communist Party of China Central Committee, Chinese president and chairman of the Central Military Commission, emphasized that the Chinese economy enjoys strong resilience, tremendous potential and great vitality. The effects of various policies continue to show, and the overall economic operation is expected to pick up next year. In the New Year, how can China strengthen the confidence in economic work and expand its economy in a stable manner? The Global Times invites scholars to share their views over the issues. This is the second article of the series.

As 2023 opens, analysis naturally turns to economic prospects for the coming year and the wider period. Any factual study of this leads to a clear conclusion. China's economy, having far outperformed that of the US and EU during the pandemic, will accelerate further this year while Western economies will stagnate.

Given this, it is a striking indication that some Western commentators are engaged in propaganda unrelated to facts, and that attempts are being made to claim that it is China which faces problems while the Western economies will perform well. The most well publicized of these was by US economist Paul Krugman, who claimed in the New York Times: "the Chinese economy seems set to face major problems over the next two or three years." As Krugman's deliberate ignoring of reality, and elementary economic errors, are sometimes repeated elsewhere, it is useful in surveying economic prospects for 2023 to examine simultaneously both economic developments and Krugman's errors.

The starting point is what already occurred during the pandemic and is therefore not opinion but facts. During COVID-19 pandemic China's economy grew three times as fast as the US economy and five times as fast as the EU economy. In the last three years, to the third quarter of 2022, China's economy grew by 14.3 percent, the US by 4.8 percent, and the EU by 2.8 percent. Japan's economy GDP contracted by 1.9 percent.

The further speeding up of China's economy during 2023, and slowing of the main Western economies, is determined by both short- and long-term developments. The key short-term fact is the consequences of the inflationary wave which swept through the Western economies during the last two years and which China escaped. These opposed inflationary situations dictate that the US and EU will purse contractionary economic policies during 2023, slowing their economies, while China has ample room for economic stimulus.

China's avoidance of the inflation which struck the Western economies during the pandemic is as striking as its outperformance in growth. Starting with December 2019, the eve of the pandemic, in the period leading to the latest data for November 2022, China's consumer price index declined from a 4.5 percent rise to a low 1.6 percent, while US inflation rose from 2.3 percent to a peak 9.1 percent in June 2022 and remains high at 7.1 percent. Eurozone inflation rose from 1.3 percent to 10.1 percent. In 2022 Western economies passed through their worst "stagflationary" situation for almost half a century - price rises were the highest for 40 years while economic growth has fallen by half in the same period.

This is crucial for 2023's prospects as it means China and the US/EU are in completely opposite positions regarding the possibility to launch economic stimulus. China, with low consumer price rises, has economic space to launch stimulus measures without risking higher inflation.

Indeed, not only macroeconomic factors but price trends facing Chinese producers determine that such stimulus measures are necessary and will occur. China's producer prices had fallen 1.3 percent year-on-year in October. Any prolonged producer price fall is undesirable as it puts downward pressure on companies. Therefore, even for price reasons, economic stimulus is possible and desirable in China in 2023 - the Chinese authorities have made clear that expanding domestic demand is a priority for the year. Consequently, not only does China enter 2023 with much higher growth than the US/EU during the pandemic but it has economic space to launch stimulus measures. China's economy, therefore, will accelerate in 2023.

The US/EU's situation is the opposite. They will pursue contractionary economic policies in 2023. Not only consumer, but US/EU producer price inflation, remains very high - 7.4 percent in the US, 30.8 percent in the Eurozone. Simultaneously US wages are rising at the fastest rate for 20 years. With existing high consumer price rises, and inflationary pressure coming from high producer price increases and high money wage increases, there is no room for the US Federal Reserve to launch any economic stimulus or short-term reduction in interest rates or other expansionary monetary measures if it aims to control inflation. Indeed the US money supply is falling - an unusual and contractionary economic situation.

These economic factors intersect with COVID related health ones. In 2022 China's economy was slowed by spreading lockdowns to tackle the highly transmissible Omicron variant. Now China's anti-pandemic policy has changed, its economy will receive a further boost in 2023 from absence of such lockdowns. In contrast, the US abandoned lockdowns a long time ago and therefore will receive no extra boost in 2023 due to this factor.  

Turning to longer-term trends, Krugman's arguments are based on such elementary errors that it is rather embarrassing for anyone to advance them. Krugman's reason for predicting slow growth in China is that it is allegedly incapable of developing consumption - according to Krugman's disparaging comment this has merely "tricked down" to China's population: "Too few of the gains from growth have trickled down to households."

The briefest look at the facts shows the absurdity of this claim. During the 21st century China's annual average growth of total household and government consumption is 8.5 percent - the world's highest. For comparison, the average US increase was 2.0 percent. China's annual average increase in household consumption at 9.0 percent is also the world's highest - the US rate was 2.2 percent. With both total and household consumption in China growing more than four times as fast as the US, the American population would be extraordinarily delighted if they received the same rate of increase of their living standards as "trickled down" in China! In fact, China's consumer market, expanding more than four times as rapidly as the US, is the world's fastest growing.

Why does Krugman come up with this factually absurd claim that China's long-term growth will be slow because it is incapable of developing consumption? As Krugman's elementary errors appear elsewhere, it is worth clarifying.  

Krugman makes the elementary mistake of confusing the growth of consumption and the share of consumption in GDP. It is irrelevant to people's real lives what the share of consumption in GDP is. For example, the Central African Republic's consumption share of GDP is 99.95 percent, compared to only 54.3 percent for China. Should therefore Chinese people envy inhabitants of the Central African Republic? Or should Chinese people prefer a 2 percent annual increase in consumption, the US rate, to their own 8.5 percent - because the share of consumption in US GDP is higher than in China? What matters for people's lives, and economic development, is consumption's rate of growth, not its percentage in GDP.

Krugman's errors are, however, closely related to the mistakes which created the worst stagflationary crisis in the US in half a century. The US response to the pandemic was what Krugman advocates for China, to raise the percentage of consumption in its GDP - this increased from 81.5 percent before the pandemic to 82.3 percent. Simultaneously US net fixed investment fell from 4.8 percent to 3.8 percent of GDP. What accompanied this shift was the biggest US inflationary wave for 40 years causing falling US living standards!

This was no mystery. Consumption by definition is not an input into production - therefore, it does not add to a country's productive capacity. Increasing consumption's share in the economy therefore increases demand but not supply - investment adds to productive capacity and therefore increases both demand and supply. It may be correct and necessary in the short term to stimulate consumption, as is the case in China today where the effect of COVID lockdowns has limited consumer spending. But in the medium and long term if demand is increased but supply is not inflation will be the result - precisely as occurred in the US. US stimulus packages over the last two years, by lowering the level of investment in its economy, will therefore slow its long-term growth. China's economy will consequently continue to outperform the US economy not only in the short but the longer term.

A similar false claim to Krugman's was made in the British Daily Telegraph, which argued recently that China: "misread the Lehman crisis of 2008, supposing it to be a… crisis of American laissez-faire capitalism… it was China that suffered the deeper damage." The facts are that from 2007, the eve of the international financial crisis, to 2021 the US economy grew by 24 percent, the EU economy by 14 percent, and China's economy by 177 percent! It is an indication of the hollowness of the claims by Western commentators that their errors do not even have to be found by deep analysis, it is merely necessary to compare them to readily publicly available data.

The facts show clearly that regarding China's economy in 2023, the issue is by how much it will accelerate, whereas in the US it is by how much its economy will slow down. After three pandemic years during which China already outgrew the West by a huge margin, this is an extremely striking, but very far from unexpected, situation.  

The author is a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China. opinion@globaltimes.com.cn