US is becoming the biggest uncertainty in future global economic growth

By Lian Ping Source: Global Times Published: 2020/8/7 2:20:11

A shuttered business is shown on July 21, in the Brooklyn borough of New York City, the US. Photo: AFP

Throughout the second half of the year, the US economy is expected to be operating alongside the nation's wide-spread epidemic, racial tensions and domestic factionalism. Potential social risks brought about by the three issues will further hinder the economic recovery of the US, and the American economy may become the biggest uncertainty in global economic growth.

As the world's largest economic entity, the US' recession will directly drive down the growth rate of the global economy. Since the US has maintained close economic and trade ties with most of the major economies around the world, its recession will lead to a drastic plunge in global demand, further causing contractions in trade and investment of those economies.

The US has rolled out a series of policies to monetize financial deficit in a bid to stimulate economic growth amid the fallout of the pandemic, which has aggravated financial risks in the country, and cast a shadow over further investments.

The ongoing China-US trade disputes may even expand to financial areas. Though the fallout from a possible financial dispute remains unclear, it could become another risk for the global economy during the second half of the year.

The US' failure to handle the coronavirus may even prolong the pandemic, which has already become the most critical variable in the global economy. Instead of flattening the curve, the US, during the past few months, has being speeding along a path to higher numbers of infections and is reported to have over 25 percent of the world's total confirmed cases.

Meanwhile, the horrid death of George Floyd triggered massive anti-discrimination demonstrations in the US, which are adding pressure to epidemic prevention. 

The country is also struggling with contradictions between the need to quarantine and the desire to reopen the economy. Viruses don't have a nationality, and if the rate of infections in the US continues to rise, the vulnerable global economy will surely take yet another hit.

The US economy relies heavily on consumption. It is also the world's largest consumer of finished products. With COVID-19 ripping across the US, skyrocketing unemployment has resulted in sliding consumption which in turn is causing a decline in exports from its trade partners.

The US' huge debt and expanding stock market bubbles have damaged the confidence of global investors. In order to tackle the fallout of the pandemic, the US government has launched massive stimulus packages and the US Federal Reserve has pledged unlimited quantitative easing, drastically accelerating the US' deficit.

The massive QE could ease a liquidity crisis and pressure on small businesses in the short term, however, it won't boost the economy's internal growth. Instead, it could create further risks in financial markets.

According to World Bank data, US GDP reached $21.43 trillion in 2019, accounting for 24.42 percent of the world's GDP. Based on the IMF current estimates, the US economy is expected to contract 8 percent this year, meaning it could cause global growth to decline about 2 percentage point.

Although market institutions have forecast a potential recovery of the US economy in the second half of the year following its drastic plunge of 32.9 percent in the second quarter, those forecasts were based on a better containment of the virus in the US. The current rate of infections is not at all reassuring.

The author is head of Zhixin Investment Research Institute.


blog comments powered by Disqus