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[Analytics] US-China reset – and the Philippines

After four years of US-Sino tensions, the Biden administration could speed up US recovery while restoring bilateral trust with China. The reverse would undermine those prospects. Where does that leave the Philippines? Dan Steinbock specially for The Manila Times.

In the near future, the key question is whether China’s recovery will prevail amid the dire global landscape and whether US recovery will begin later in the year.

Positive developments would support global economic prospects. But the reverse applies as well.

US: Growth in return for debt

Following the disastrous handling of the global pandemic and pervasive internal divisions, the US economy suffered a negative 3.5 percent contraction in 2020 despite lowered interest rates, low inflation, weak dollar and huge fiscal injections.

The Coronavirus Aid, Relief and Economic Security Act has kept the economy humming between the lockdowns, but exports have contracted. Industrial production has begun to recover but even more slowly than consumption. Thanks to tariff wars, the trade deficit in goods soared to a record high last year.

Better days won’t return before a critical mass of vaccinations; perhaps, around the third quarter. Meanwhile, domestic divisions and tensions will remain elevated.

The consumption-led recovery is leveraged to the hilt, relying on costly stimuli and rapidly rising debt. In the past four years, US national debt has soared to more than $28 trillion, which puts the US federal debt-to-GDP (gross domestic product) ratio at 131 percent ‒ close to that of Italy, which has struggled with debt crises for a decade.

Instead of focusing on the size of US debt, policymakers will seek to keep real interest payments below 2 percent of GDP. The goal is to have adequate fiscal support and needed public investments, while maintaining a sustainable public debt.

As a share of GDP, the cost of servicing US debt has fallen since 2000 even as federal debt has increased because low interest rates make it easier to pay off debts. But the net effect is a ticking time bomb: deficits will more than double to 10.9 percent of GDP by the 2040s, according to nonpartisan congressional research.

Due to the size of the US economy, the world economy will not be immune to negative spillovers.

China: Key indexes signal broad recovery

In 2020, China’s real GDP growth of 2.3 percent exceeded expectations. It was the only major economy to avoid negative economic growth.

Although consumption is still constrained, investment is likely to be buoyed by government-financed infrastructure projects and solid performance in the property market. In November, the indexes for manufacturing, service, trade and consumption were encouraging. And exports pushed the trade surplus to a record high in December.

Growth in the fourth quarter of last year rose to 6.5 percent year-on-year as consumers returned to malls, restaurants and cinemas. Thanks to across-the-board recovery, the yuan has surged in strength against the US dollar and other major currencies.

Despite US-Sino tensions, foreign companies continue to pour money into China, thanks to the new foreign investment law to further open the economy. In real terms, inbound foreign direct investment hit a record high of $144 billion in 2020.

Importantly, the integration of the Chinese financial market with the global financial markets has accelerated, thanks to China’s regulatory reforms. Foreign ownership of onshore Chinese stocks and bonds is likely to increase in 2021.

PH: From worst contraction to solid recovery?

In the past year, the Philippines like many other countries has been hit hard by protracted lockdowns, extended quarantines and stringent restrictions. While these measures likely saved thousands from pandemic deaths, GDP contraction by 9.5 percent in 2020 was the steepest in postwar history.

All key sectors in the economy contracted in the fourth quarter. Government hopes GDP growth to soar to 7.5 percent to 8.5 percent or more due to 2020 base effects. The assumption behind the projections is that the worst of the pandemic is now behind.

Here are some caveats: new local transmissions could still cause targeted lockdowns. Second, if cross-border activity is normalized too early or inefficiently, new pandemic strains could escalate. Third, the arrival of vaccines could take longer than anticipated, and the distribution could prove slower than currently expected.

Household balance sheets have weakened. Business defaults still loom ahead. Unemployment remains high. At the end of 2020, over 550,000 displaced overseas Filipino workers (OFWs) returned to the Philippines while more than 125,000 OFWs were waiting to be repatriated.

Nonetheless, the economic potential of the economy remains significant and the government hopes that the infrastructure budget can help create 1.7 million jobs. Certainly, it is not a time for conservative austerity, but for rapid and expansive job creation.

World: China fueling over a third of global prospects

International headwinds are likely to intensify. As the Biden administration will target Asia, Kurt Campbell, as coordinator of the National Security Council’s Indo-Pacific affairs, is pushing for greater “ally engagement” in the region.

Promoting more cost-efficient asymmetric military investments, Campbell hopes to cut US expenses while diversifying costs and risks to allies in the region.

What the Philippines needs is to focus on economic development and push for a common Association of Southeast Asian Nations economic and security agenda. If tensions escalate in the region at the expense of destructive rearmament drives, the Asian Century will fade away.

This year, China’s economic growth is expected to rise further to 7 to 8 percent, followed by stabilization to 5.5 percent in 2022. Rapid recovery has brought the Chinese economy closer to the US economic output, which it could surpass by the late 2020s.

In December, the Organization for Economic Cooperation and Development forecast that global GDP will reach the pre-pandemic level by the end of 2021. In this view, China will account for over a third of world economic expansion.

That contribution is critical to the global economy and US recovery and bodes well for emerging Asia, including the Philippines – if the country can focus on economic development and sustain effective neutrality amid regional tensions.

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group.

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