China is Bouncing Back; US, Europe Lagging

China is bouncing back with a vengeance, from the contraction of 6.80% seen in the first quarter of this year, at the peak time of the pandemic.

Economic growth has picked up very fast. China reported a GDP growth of 4.90% on a Y-O-Y basis, up from 3.20 % clocked in Q2 of this year. This is a clear indication that the economy is back on track for better growth. The manufacturing PMI at 53 is also evidence of the accelerating manufacturing activity. On the trade front, both exports and imports have increased over the last six months, exports grew at a 9.90 % rate on Sept.20, while imports grew at a rate of 13.20% compared to the same period in the previous year, and exports to the US rose by 20%. After the dip in trade seen in Q1, the exports and imports have continuously risen over Q2 and Q3.

The focus of policy in China was more on protecting the smaller businesses and smaller entities who are more susceptible to failure in difficult times. Financial sector support was also tuned more towards the requirements of this segment of the economy, and it seems to be paying dividends now. The appreciation in Yuan from 6.90 to 6.65 against the US Dollar is also a fact that is coming out straight from the numbers that are seen in trade.

China has started focussing more on domestic demand as the force that will be able to support growth in the long run, and this inward-looking policy is more pronounced after the pandemic and the consequent disruptions.

The US stands at crossroads with the elections over and the results awaited over the next few days. There is a perception that any regime change in the US may lead to lot of changes though the fact is that when it comes to basic policies in defence, trade, foreign relations etc. are concerned, changes do not happen with change in governments, but changes do take place as relationships evolve over time.

But there are one or two things that may be happening with a change in regime. First, the important thing is the hugely reduced rate of corporate taxation at 21%, fixed by the current government. This was brought down from 35%, and this helped repatriation of retained profits abroad by US corporations back into the US. This rate may be revised upwards to 25% or 28%. Second, the trade and tariff war with China led to global economic slowdown and disruptions, and also fear in the minds of many European countries whether they would be the target in the second phase after China. A regime change may pave the way for fresh negotiations with China for a conclusive deal as far as trade and tariffs are concerned. This will remove a lot of uncertainty surrounding the trade arena.

As far as the US is concerned, what matters most is the response to the raging pandemic with measures that are specifically meant to arrest its spread. There has not been an effective policy in this regard so far. This should be a priority for the new government, in the absence of which, the loss of lives and the economic damage that it would entail will be deplorably phenomenal. The US also needs to decide about further financial incentives to people who are out of employment. There was no agreement in this matter between the two major political formations. But, in the absence of a  stimulus that would help bid up retail and consumption demand, the recovery seen in the GDP may
not be sustainable for a long time. In the event of any lockdowns and consequent losses, the overall economic conditions could become precarious, as we are heading into a cold winter.

The ECB has announced its intention to go in for further quantitative easing and economic stimulus. This has arisen from the need to provide an insulation to the battered economies from the violent spread of the pandemic. The lockdown in differing degrees is going to impact most of the economies including Germany, France, Italy etc. and some of the East European economies also. The economic cost of the lockdowns can be assessed more or less accurately with the experience gained from the earlier shutdown, in the first months of this year. The picture is not at all different even in the UK which has also gone in for a shutdown. In addition to this, the probability of a no-deal Brexit also looms large in the horizon pointing towards more hurdles for the UK as the days pass by.





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