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Prospects Weekly: Concerns about global economic prospects amid loss of confidence

Concerns about global economic prospects amid heightened financial market turmoil are weighing on consumer spending despite the relief coming from lower commodity prices. Associated uncertainty is reflected in a sharp decline of gross capital flows to developing countries in Q3, with bond and equity flows having plunged as investors sought safe-haven assets.

Can China become the engine for world economic growth?

David Dollar's picture

This somewhat provocative question was the title of a conference hosted by Oxford and Standard Charter this week in London.  My answer was: "No, not tomorrow; but yes, eventually – especially if China continues to vigorously pursue economic reform."
 
The reason that China cannot be the engine of global growth tomorrow is straight-forward.  For the last decade an awful lot of the final demand in the world has come from the U.S.  That era is over for the time being as U.S. households now concentrate on rebuilding their savings.  No one country can fill the gap left by the slowdown in U.S. consumption: Japan, Germany, and China together have less consumption than the U.S., so no one of them can replace the U.S. as the major source of demand in the world.  It's not realistic to expect China to play that role.  But we are probably moving into a more multi-polar period in which there is more balanced growth in all of the major economies. 

Is China de-linking from the U.S. economy?

David Dollar's picture

The year 2007 was an important milestone in modern economic history.  While the U.S. grew well, China contributed more to global GDP growth than the U.S. did.  That pattern is likely to continue for the foreseeable future.  Roughly speaking, the U.S. economy is about four times the size of China’s.  If the U.S.