Global Economic Update
Sign up for myFT Daily Digest and be the first to learn about global economic news.
The author is the head of Citi’s Emerging Markets Economics Department
It is often heard that China now accounts for about one-third of global GDP growth. This is true, but the more interesting statistics are: in the 10 years before the pandemic, China accounted for nearly half of global investment growth on average—in fact, 47%.
Since investment spending supports the dynamics of global trade and global commodity demand, China’s huge role in shaping the global investment cycle means that any economy that is open or dependent on commodities becomes “dependent on China.” This is true for Germany and Brazil.
But China’s dominance in the global investment cycle is coming to an end, not so much because the country will reduce investment, as it is because the United States and Europe are working to increase investment.
In principle, this should be good news for global growth. However, because economic nationalism is an important reason for the West to pay more attention to capital expenditures, the world economy will not get the benefits it deserves from the emergence of new sources of investment expenditures. This is all about the economics of self-reliance.
In recent years, China’s dominance in the global investment cycle stems from two trends, both of which stemmed from the 2008 financial crisis.
First, China’s response to the crisis is to stimulate the economy by increasing infrastructure and real estate spending, ensuring that its economy remains heavily dependent on such activities.
At the same time, the austerity measures taken by Western governments in response to the crisis have meant that investment spending has fallen, because usually this kind of “postpable” thing is the first victim of any government’s efforts to control spending. At least in Europe, investment spending in the private sector has also been exceptionally weak and has continued to decline over the past decade.
However, investment spending is expected to achieve GDP growth in the future because it reflects the efforts of the economy to provide transportation infrastructure or purchase the machinery and buildings needed to produce goods and services.
From this perspective, if China is excluded, the investment/GDP ratio in the rest of the world today is lower than before the financial crisis, which is frustrating.
It’s obvious that this state of affairs is about to change, for example, from the recent approval of the U.S. Senate Infrastructure Investment and Employment Act. This promised approximately $550 billion in additional federal investment in roads and bridges, water infrastructure, and the Internet.
at the same time, European Recovery and Recovery Fund It resonates strongly with the American plan. Both are aimed at upgrading infrastructure, especially to achieve the diversification and security of the supply chain, but also in a way that supports climate change goals.
Western governments’ new enthusiasm for investment spending is partly a response to years of neglect, and is clearly driven by how cheap borrowing is today. But it is also affected by competition with China.
In the United States, the White House’s June report The 250-page analysis on “Building a Resilient Supply Chain” aims to reduce the U.S.’s vulnerability to supply chain disruptions in four areas: semiconductors, high-capacity batteries, active pharmaceutical ingredients, and key minerals and materials.
The report believes that the deficiencies in all these areas are partly the result of “inadequate US manufacturing capabilities,” so it is clear that the geographically dispersed supply chain is no longer supported by US policymakers as it used to be.
Behind the United States’ pursuit of self-reliance is a national will to free the economy from its dependence on nemesis China.
In fact, it is not only the West that will increase investment to improve self-reliance. In China itself, policy decisions are now being influenced by its “dual cycle strategy,” which is Beijing’s response to what it considers to be a more hostile external environment and the emergence of technological nationalism. Therefore, the strategy needs to continue to favor investment expenditures in the semiconductor, artificial intelligence, quantum computing, biotechnology, and automotive and aerospace industries.
In theory, more investment activities should make us more optimistic about growth. But if all of these investments are inward-looking and aim to replace global trade rather than complement global trade, then it will be difficult to get excited about the new global investment push.