The US and China are responsible for almost half of the world’s economy; considering the scope of their trade and financial flows, these countries could set the pace for the global financial markets. This is especially true if both countries coordinate well in terms of demand management policies. The G-20 had already been set up for this yet policy coordination remains an issue.
As usual, the US will continue to set the pace for the global economy. However, the country has a price to pay for failing to establish better economic policy coordination with its major trade partners.
Experts believe that Washington won’t be able to implement higher public spending and tax cuts due to huge trade deficits and rising public debt, among others. Meanwhile, it’s expected that the Federal Reserve won’t be in trouble so as long as the central bank keeps reasonable inflation expectations.
China, on the other hand, could also provide support for the world’s economy thanks to its reduced reliance on exports. At the moment, the country is getting most of its profits from investments and household consumption.
Beijing had a negative trade balance last year and its large tax cuts were accountable for nearly 1% of the economic growth. To top that off, the said tax cuts will continue this year as well, along with the strong support for aggregate demand. This is one of the country’s major steps to achieve steady growth and execute reforms of the financial sector.
China’s progress on economic reforms and trade adjustments is something that the US could follow as an example, analysts say. Also, aside from enhancing policy coordination, the US must focus more on the import and export transactions with other countries; this should have a direct impact on the dollar’s exchange rate, employment, public debt, and overall growth.
When compared to the US and China, Europe needs to keep up. So far, experts are considering this economic union a huge disappointment. As a major part of the European Union, the eurozone is having trouble implementing a monetary-fiscal policy that could fix its slow-moving economy and employment rate; most countries in the eurozone could, in fact, ease their financial stance (to a degree) with the exception of Spain and Greece.