Wednesday 16 January 2019

Best thing Trump and Xi can do for growth in 2018 is... nothing

US President Donald Trump and Chinese President Xi Jinping
US President Donald Trump and Chinese President Xi Jinping

John Foley

The world is headed for a year of smooth economic sailing. How smooth depends on US President Donald Trump and Chinese leader Xi Jinping.

The best thing that a duo who steer one-third of the planet's GDP can do for growth is nothing. Almost half of the 2.9pc increase in global GDP forecast by the World Bank for 2018 comes from the United States and China.

Investment and consumption are rising reasonably strongly in both, and central bank policy will remain generous.

Britain, which is heading for a divorce from the European Union, has a more brittle economy but contributes just 2pc of the world's growth.

The damage it can inflict will be limited.

Mr Trump could cause harm by dismantling the global trading system of which the United States is a linchpin. The US congressional system contains checks and balances when it comes to war or bad policy but the president has considerable freedom on trade. He has already raised tariffs on some Chinese aluminium products.

Talks over NAFTA, or the North American Free Trade Agreement, the US trade pact with Mexico and Canada, are tense. Only Congress can annul NAFTA. But if Mr Trump pulls the plug, it will be as good as dead, to the detriment of jobs and productivity.

China could crater too, if Mr Xi wills it. Activity will slow sharply if he curbs abundant credit growth, which is boosting house prices, investment, and imports. China's home-made measure of broad credit, called "total social financing", is still growing far faster than nominal GDP.

True, debt - forecast by the IMF to reach 300pc of GDP by 2022 - is the biggest risk for China and at some point the piper must be paid. But a bigger threat in the near term is a clumsy, too-rapid deleveraging. (Reuters)

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