Everyone is talking about the decline of the US economy, but the gap between China and the US GDP in the first quarter has shocked many people. In the first quarter, China's GDP dropped from 70% of the US to 64%, which means the gap between China and the US GDP has widened again. What is the reason? Is our economy not as good as the US? What is the truth?

Is the gap between China and the US GDP widening again?

Recently, China's first quarter GDP data was announced, with a GDP growth rate of 4.5% and a total of 28.5 trillion yuan. This growth rate is relatively considerable, but compared with the US economic data, the gap has widened!

In fact, people are quite pessimistic about the US first quarter GDP data. After all, the global economy is declining, and both the previous IFM and the domestic expectations for the US economy in 2023 are not optimistic.

Especially after China announced its economic data early, the US delayed the announcement, and many people believe that the US economic data is even worse.

According to the recent data released by the US Bureau of Economic Analysis, the US GDP in the first quarter of 2023 grew by 1.1% year-on-year, with market expectations of 2% and the previous value of 2.6%, which is far below market expectations and has slowed down by 1.5 percentage points compared to the growth in the fourth quarter of last year.

Advertisement

In fact, looking at it this way, the US economic data is also not good, and the US economy may still face the risk of recession!

However, looking at the total amount, the US GDP is 6.47 trillion US dollars, while China's is 4.16 trillion US dollars in US dollars, and the gap between China and the US has actually widened.China's share of the US GDP has dropped from 70% to 64%, which is difficult for many to understand. Why is it that the US economic growth rate is not meeting expectations, with a low growth rate, while China's is quite substantial, and yet the gap seems to be widening?

In fact, the core reason lies in US inflation, the United States' aggressive monetary and fiscal policies, and the relative appreciation of the US dollar.

Let's first discuss inflation in the United States. The high inflation rate in the US leads to an artificially inflated GDP, which is relatively easy to understand.

What does inflation mean? It means the rise in prices. Therefore, the impact of high inflation on GDP is mainly reflected through the effect on prices.

The GDP of the United States is calculated using the expenditure method, also known as the consumption method, which inevitably leads to an increase in the gross domestic product in the calculations.

This increase in GDP is often an increase in nominal GDP and does not represent an increase in real GDP.

In terms of inflation rates, since the United States began its massive monetary easing in 2020, it has driven up global inflation. Since 2021, the inflation in the United States has started to cause widespread concern.

High inflation rates lead to rising prices and economic instability, which in turn affect consumer purchasing power and corporate profitability.

Since the beginning of 2021, the US Consumer Price Index (CPI) has risen sharply for several consecutive months. In March 2023, the US Personal Consumption Expenditure (PCE) price index increased by 4.2% year-on-year.

It is important to note that inflation exceeding 4% means that the nominal economic growth rate must increase, which undoubtedly directly boosts GDP.And during the peak, inflation in the United States even exceeded 8%, setting a new high in 40 years, leading to continuous complaints from the public due to high prices. By the end of last year, polls showed that two-thirds of Americans were unhappy and hopeless about the future.

So where does inflation come from? As we all know, affected by the COVID-19 pandemic, the global supply chain has encountered severe bottlenecks, leading to shortages of some goods and driving up prices.

Secondly, the global financial policy is loose, and the large-scale fiscal spending and monetary policy of the U.S. government have all contributed to an increase in the money supply, exacerbating inflationary pressures.

Thirdly, labor shortages in some industries and rising labor costs have also had an impact on inflation.

High inflation erodes purchasing power and passes these costs on to consumers, exacerbating the problem of inflation.

In the context of inflation driving up GDP, it is evident that active monetary and fiscal policies are also driving up GDP.

Is the United States' high GDP illusory?

It is not difficult to see from the inflation driving up GDP that the U.S. GDP is somewhat inflated!

Of course, we say that in addition to inflation, there are other factors, such as active monetary and fiscal policies, as well as the appreciation of the U.S. dollar.

From the perspective of monetary policy, the United States has released a large amount of liquidity. With the release of liquidity, the cost of borrowing is reduced, and borrowing by businesses and individuals increases, which in turn increases consumption and investment activities.This expansionary monetary policy will stimulate GDP growth, but more so it will lead to an artificial inflation of nominal GDP, which corresponds to inflation.

We have even seen the United States distribute money to the public, essentially printing money and then distributing it, which, against the backdrop of inflation, results in a severe decline in the purchasing power of money. We are also aware of the fact that excessive money printing ends up disproportionately affecting low-income groups.

Furthermore, regarding fiscal policy, the United States has implemented infrastructure stimulus and subsidies for the repatriation of manufacturing. But where does the money come from? It's still through issuing debt. However, the U.S. national debt is already facing a default crisis. In fact, this kind of stimulative fiscal policy also leads to an artificial inflation of nominal GDP.

After this series of measures, the temporary economic stagnation in the United States has improved somewhat, but inflation has become uncontrollable. In response to this inflationary pressure, the U.S. has taken a series of measures.

The Federal Reserve has embarked on an aggressive tightening of monetary policy, including gradual interest rate hikes and reducing asset purchase programs, among others.

However, the results have been minimal; inflation has not been curbed, and the U.S. dollar has actually appreciated.

At the end of the first quarter last year, the U.S. Dollar Index was around 98, and now it is above 100. During this period, the index even reached 114. Therefore, compared to the first quarter of last year, the U.S. dollar remains relatively high.

GDP comparison data for other countries must be converted into U.S. dollars, which inevitably leads to a shrinkage when comparing China's GDP and the U.S. GDP in U.S. dollar terms.

To further refine the logic behind this, when the U.S. dollar appreciates, the selling price of American products in the international market becomes higher, thereby increasing the United States' export revenue.

However, this approach can also lead to the devaluation of other countries' currencies and trigger competition, thereby reducing the GDP growth of other nations.Due to the global influence of the US economy, the appreciation of the US dollar may increase its nominal GDP, but it does not necessarily reflect the actual economic performance. This, in turn, could lead to a widening gap between China's and the US's GDP!

In summary, factors such as monetary policy, fiscal policy, the appreciation of the US dollar, and inflation can all lead to an overestimation of the US's nominal GDP. Of course, this overestimation is just one reason to explain the widening gap between China's and the US's GDP. In fact, at the end of the day, the large base of the US GDP is also a factor, which also leads to the US's long-term position as the world's largest economy.

The strength of the US economy is firstly due to its innovative and competitive business environment to a large extent. The US has the most extensive venture capital market, Silicon Valley and other highly innovative technological ecosystems, as well as efficient business regulatory mechanisms. These factors have had a huge impact on the economic prosperity of the US. This is an area we need to continuously improve.

Secondly, the US has a strong dollar system. As the main reserve currency and global settlement currency, the dollar can profit globally, which also includes what we call the dollar's tidal harvest.

Thirdly, the US's technological strength and high-end manufacturing industry are very strong, with significant advantages in the field of high-end manufacturing. Especially from the point of view of the US strangling our technology, this is also a part we need to be strong in.

Overall, there are some external factors in the widening gap between China's and the US's GDP, that is, the US GDP is overestimated. Of course, there are also considerable situations, that is, although the US economy is declining, it still has its hard core points, and there are areas we need to break through.The Sense of Well-being of the Common People is the True Path

In the final analysis, for the common people, GDP is just a number. A high sense of well-being in life and high income are what truly matter!

The phenomenon of China's GDP falling to 64% of that of the United States is a fact and is caused by a variety of factors, including the global economic environment, China's economic structure, policy changes, and consumer spending.

For instance, the global downturn and depression have had a significant impact on China's exports and manufacturing industry. China's economic structure faces challenges in transformation and upgrading, and it needs to address potential financial risks.

Firstly, China's role as the world's factory places it at the core of the global supply chain. However, with the increase in the pandemic, trade protectionism, and geopolitical tensions, global demand has decreased, and the willingness of consumers to pay has weakened.

This has led to the idling of production capacity in China's manufacturing sector, which in turn affects GDP growth.

Secondly, China's economic structure faces challenges in transformation and upgrading. With the aging population and the trend of having fewer children, China is gradually shifting from low-end manufacturing to high-end manufacturing, services, and the technology sector.

However, this transformation requires time and substantial financial investment and technical support. Therefore, during this process, GDP growth may slow down.

Thirdly, China is striving to implement macroeconomic regulatory policies centered on deleveraging to address debt risks and other potential financial risks.

Although these policies may have long-term positive effects on the macroeconomy, they may also lead to a decrease in GDP growth rates in the short term.Fourthly, consumer spending growth is not strong enough. Despite the country's continuous efforts to promote consumption upgrades and increase the consumption level of residents, many people still make defensive deposits, and this is particularly high among the low-income group. This has led to a restricted domestic consumer market, thereby reducing GDP growth.

Lastly, international factors have also had a negative impact on China's economic growth. Due to the "double standards" and "decoupling" imposed by the United States and other countries on China's technology sector, China's technological progress is significantly restricted. This could affect its position in the global value chain and threaten GDP growth.

However, overall, both China and the United States face their own economic challenges and issues.

I came across an economic blogger named Yu Fenghui who said:

Although the gap between China and the US in terms of GDP seems to be widening, and it may not be possible to catch up in the short term, it is not necessary to say so definitively. The fact that we cannot catch up now does not mean that it will always be the case.

In fact, after three years of the pandemic and with the Spring Festival in the first quarter, the pandemic had not yet ended. Under such unfavorable conditions, China's GDP growth rate in the first quarter reached 4.5%, which is actually hard-won.

Of course, we say that GDP is just a number for the common people. Good economic development and high growth rates are naturally good things. Ultimately, they must be reflected in the lives of the people.

It is the royal way to strive for no severe inflation rates, not to devalue the money in the hands of the people, to increase the income of low-income groups, and to let the people have a sense of gain and happiness. On this point, we still need to make an effort!