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Restructuring Woes

Aug 06 , 2015
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

In the domestic environment that affects the US foreign policy, including the relationship with China, America’s economic status and the judgment of US society about its economic development are still the key elements, shaping the nation’s domestic and foreign policies now and in the future.

In the past two years, the US economy showed an active recovery. In 2014, it grew by 2.4%, continuing the steady economic recovery in 2013. Growth was based on such elements as the constant improvements of the labor market, growing investment, “reindustrialization” and the return of manufacturing, the steady release of potential demand, repaired balance sheet of companies and financial institutions and increased capital return after the withdrawal of QE policy. The US economy shows a better performance against the background of continuing slowdown in other major economies (like the `EU) in the world or slow growth (like the new emerging countries). However, in the long term, many deep-rooted issues that have restrained the US economy and society have not been completely solved. The era features “low growth, low employment and high debt”.

The US economy still grows below its potential growth rate. Before 2008, the US actual GDP growth was 3%, the inflation rate was 2%-3% and the nominal GDP growth was 5%-6%. Since 2008, the nominal GDP growth was 15% lower than the trend line and also lower than the potential growth rate. Recently the World Bank cut the US GDP growth rate of 2015 by 0.5 point to 2.7%. So, strong growth is still not in reach.

The US still suffers a severe “dual economic phenomenon”.  High value added finance and R&D stand in contrast to relatively low productivity and low value-added service, forming the two poles in the formation of the US economic structure. The US still has a long way to go in the manufacturing recovery and regression. In the labor structure, the US sees two extremes: One is that more of the labor force is of a high level of education and skills; the other is a labor force with a low level of education and low skills while the mid-level skilled workers are in serious shortage. With the reduction of the active labor force, labor participation rate has dropped to 62.6%, the lowest since October 1977. The employment gap caused by idle workers is still big. According to the US Federal Reserve Bank forecast, the US employment gap is 1.2% lower than the average level.


Huge federal government debt is a big burden.   The fiscal cliff that has plagued the US has been much mitigated. In the fiscal year of 2014, the US federal deficit’s proportion of GDP fell to 2.8%. The fiscal budget released by the new fiscal public budget of 2015 was $474 billion, accounting for 2.5% of GDP, much lower than the 9.8% of 2009 fiscal year. The fast increasing momentum of the US federal government debt has been curbed, but the source of debt service and the ability to create wealth still widely deviate from each other. The economic bottoming out and fiscal consolidation has contained the growth of the US federal government debt, which was faster than the economic fundamentals and the fiscal revenue.

After 6 years of recovery, the deleveraging by the private sector has put the US economy into a new round of growth. Increasing family wealth and the continuingly improved employment market have supported household consumption. Stimulated by such elements as the lower financing cost, increasing capacity utilization and business confidence, private investment is gradually stimulated. Helped by the economic recovery, the federal government debt ratio in the 2014 fiscal year clearly narrowed, to 2.8% from 4.1% over the previous fiscal year. However, the debt ratio of governments at all levels is still 319.3%, among the highest ratios in the world. The situation that the available source of debt service deviates from the ability to create wealth has not improved. The total US federal debt reached $18 trillion in 2014, exceeding GDP for the first time in history.

The US poverty gap has nearly reached its biggest spread in a hundred years. According to the US survey of Consumer Finance, since the financial crisis in 2008, the American lower-income households take account of 1% of the American total wealth in 2013 while the 5% richest Americans enjoy 63% of the American total wealth with their income proportion the highest in history. The income of the middle-class group has shown a declining momentum. The poverty gap in the US further enlarges and the wealth inequality has reached the highest level in over a hundred years.

Also, a close look should be taken at the effect of the US monetary policy adjustment on the global and the US economy. While the US Federal Reserve is cutting its bond-buying programs and finally normalizing interest rates, how to control the withdrawal time of a series of policies of stimulating credit, investment and consumption is vital and complicated, bringing a big uncertainty to the US economic recovery. The US QE withdrawal can be said to be the US Federal Reserve’s new start, turning from a 10-year QE period to a period of normality. With the US dollar growing stronger, increasing interest rates will put the dollar-denominated overseas debts of the newly emerging economies at risk, greatly increase the risk of global economic and financial spillover risk and increase the burden of some newly emerging economies in international debt service, intensifying the default risk. Especially when the Greek debt crisis rises again, the risk of European debt lingers, the newly emerging markets fluctuate sharply, national currencies devalue and capital flows out, the US should take the important responsibility of maintaining the global financial stability and international policy coordination.

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