Worldwide, the economy is healthy. Now, the leaders of the two countries with the most sway over its fate need to leave it alone.
The world is headed for a year of smooth economic sailing. Just how smooth depends on United States President Donald Trump and Chinese leader Xi Jinping. The best thing that a duo who steer one-third of the planet’s gross domestic product (GDP) can do for growth is nothing.
Almost half of the 2.9 percent increase in global GDP forecast by the World Bank for 2018 comes from the U.S. and China. Investment and consumption are rising reasonably strongly in both, and central bank policy will remain generous. The UK, which is heading for a divorce from the European Union (EU), has a more brittle economy, but contributes just 2 percent of the world’s growth. The damage it can inflict will be limited. Trump could cause harm by dismantling the global trading system of which the U.S. is a linchpin.
The U.S. 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 aluminum products. Talks over the North American Free Trade Agreement (NAFTA), the U.S. trade pact with Mexico and Canada, are tense. Only Congress can annul NAFTA. But if Trump pulls the plug, it will be as good as dead, to the detriment of jobs and productivity.
China could crater too, if Xi wills it. Activity will slow sharply if he curbs abundant credit growth, which is boosting house prices, investment, and imports. China’s homemade measure of broad credit, called “total social financing”, is still growing far faster than nominal GDP. True, debt – forecast by the International Monetary Fund to reach 300 percent 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. Xi is less liable to use his powers rashly than the U.S. president.
Moderates, such as economic adviser Gary Cohn, have so far tempered Trump’s actions. They may not stick around. Were midterm elections in 2018 to hand the Republican-controlled Congress to the Democrats, support may grow for retaliation against perceived trade slights. Both leaders have good cause to want the synchronized expansion to continue. Besides being responsible for economic smooth sailing, Xi and Trump are also the biggest beneficiaries. Inaction, or impotence, are therefore the best things they can give to the world.
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