This time last week I was interviewed by Bloomberg and CNBC to discuss a divergence in business optimism between China and the US revealed by our Q2 International Business Report (IBR). The results were surprising: Chinese business optimism is at an all-time low whilst their US peers are more optimistic than at any time since 2005.
So what’s happening in these two economies?
Well, the first thing to note is that China is still growing rapidly. The Economist Intelligence Unit expects its economy to expand by 7.5% in 2013 compared to 2.1% in the US. But IPO regulations are also being tightened and the new leadership is certainly ramping up efforts to rebalance the economy away from investment and towards consumption.
The news in June that China’s central bank had declined to offer liquidity to small lenders sent interbank lending rates rocketing and the stock market tumbling. Order has been restored but I expect slower growth to be tolerated in exchange for greater sustainability over coming years. News that exports fell by 3.1% year on year in June seems to back this up.
By contrast, the US Federal Reserve remains focused on expanding its balance sheet. Suggestions that it would start tapering its programme of quantitative easing if the economy kept improving sent emerging markets around the world into a spin. But Ben Bernanke has been keen to stress that tapering is not the same as tightening. Bond purchases will continue, but at a slower rate.
Either way, the US economy is certainly improving notwithstanding the downwards revision of Q1 growth to 1.8% at an annualised rate. The housing market is buoyant: More than a third of all homes bought in the US in May were not even under construction yet. That’s close to a seven-year high. House sales lead to purchases of furniture, gardening and other services and higher house prices also boost consumer confidence. The automotive and technology sectors are also strong. The economy added 195,000 jobs in both May and June. And the Dow Jones has climbed by 15% over the past 12 months.
Of course, business growth prospects would be best served by a strengthening of both markets. The US is China’s leading export market, accounting for 17.2% of exports and the fourth largest source of its imports. A move towards stronger, more sustainable growth in both economies should be welcomed by business leaders.