China’s GDP rose by a slightly larger than expected 6.7% in Q2, as the world’s second largest economy showed increasing stability. There are concerns however that the foundation of this growth is not as secure as many would hope.
Increased spending by consumers, as well as increased lending by financial institutions has fuelled the recent growth. While the increased consumer spending is in line with the government’s efforts to switch from an export based economy to a consumption based economy, increased debt levels raise long-term concerns over the sustainability of this growth.
As we saw in the United States and much of Europe, debt fuelled growth can increase the fragility of the economy, culminating in a serious crisis. The chart below, courtesy of Bloomberg, shows the rising growth in credit:
With growth in the western world slow, the trajectory of the Chinese economy has important effects on all of us. Economic growth is increasingly dependent on emerging economies, especially China and India. Europe is stagnant, the United States continues to grow at a rate far below the historical average, and inequality is rising, putting increased pressure on our political and economic systems.
This means that the growth of China is more and more the driver of the global economy, and any economic crisis or decline in growth will have far reaching negative consequences.
Of course, this means that the stagnant economies of the west have to do their part to become dynamic and innovative again while addressing serious societal problems. As I’ve written before, one solution is to bring in a Guaranteed Annual Income, which will make government more efficient, provide income security for all, and unleash the dynamism and creativity of the economy.
Without making big changes, we will continue to be increasingly reliant on what happens in other places. And while China’s GDP numbers may look hopeful now, the growing mountain of debt around the world can’t be ignored forever.