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Global Economy

Business optimism split in superpowers

China and US economies take steps towards more sustainable growth

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.

The US economy is improving despite a downward revision of Q1 growth to 1.8% annualized. The housing market is strong, with over a third of homes bought in May not yet under construction, a seven-year high. House sales stimulate other purchases, and higher house prices boost consumer confidence. The automotive and technology sectors are performing well, and the economy added 195,000 jobs in May and June. The Dow Jones has risen by 15% over the past year.

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.