A solid US economic recovery is good news for Europe – but how does China fit into the picture?

The two great powers in Washington and Beijing will eventually settle into more comfortable coexistence, writes Hamish McRae

Joe Biden is seeking to boost the US economy (AP)

The American economy is going to emerge from the Covid-19 pandemic better than any other large economy bar China. To people critical of the country’s response to the crisis and the delays in rolling out vaccines, this might seem strange, but actually it looks – in relative terms at least – in pretty good shape.

First, the numbers. We only have preliminary ones and they are always revised, but the IMF reckons that the US economy declined by about 3.5 per cent last year. That is the worst since the 1940s, but compares with the 9.9 per cent decline shown by the UK, a 5 per cent fall in Germany and a 7 per cent one for the eurozone as a whole. Figures for China, by contrast, suggest it rose by 2.3 per cent over the year.

All those numbers will be radically revised and my own guess is that in a couple of years’ time the UK’s performance will be shown to be not nearly so catastrophic. But it is already clear the US will have escaped relatively lightly compared with other developed economies.

This year the divergence will increase for three main reasons. First, it is whacking in a bigger fiscal boost than anywhere else. The administration of Joe Biden is proposing another $1.9 trillion on top of the $0.9 trillion at the end of December. That will get cut by Congress, but it will still be huge.

Second, technology companies have been the biggest beneficiaries from the crisis – think Amazon, think Google – and they are almost all American. Third, ultra-easy money pumped out by the Federal Reserve has driven an asset price boom, with shares at all-time peaks. People with assets are richer than ever before and will spend some of that wealth when they are allowed to do so.

Pile these together and you have the huge spending spree that will jack the economy up through the rest of this year. Other countries are trying to jack up their economies too, but there is nothing like this scale in Europe, the UK or Japan. With the partial exception of China this is the biggest boost on earth. There are many reasons to be concerned about regional imbalances in the US economy, the extent to which wealth inequality has risen, and the durability of the financial boom. But right now the economy looks like regaining all the ground it lost last year by next December.

But what about China? Here the story darkens. In narrow economic terms China has done very well to keep growing through this crisis, just as it managed to do after the financial crisis of 2008-09. But in wider geopolitical terms there has been huge damage for all the obvious reasons.

I don’t think we can yet know quite how to calculate that. We do know, or at least can be pretty sure, that the Biden administration will keep up the pressure that the administration of Donald Trump had started to exert. We also can be pretty sure that China’s growth last year will mean that it passes the US in overall size later this decade, rather than early next.

In a nutshell, the US has had a good economic performance compared with the rest of the developed world, but a bad one compared with China. What happens next?

There are several things to look for. One will be the costs of the policies that have been deployed to drive the recovery. I am very worried about how and when the asset price bubble will burst. Another will be how the US manages its already tense trade negotiations with Europe, now that Germany is still pressing ahead with the gas pipeline from Russia, Nord Stream 2. But the biggest worry of all will be the way the pandemic has affected the reset of relations with China.

On a very long view, the US/China relationship will be fine. China is booming now, but as its population ages and its workforce starts to shrink it will become a less vigorous competitor. The US population by contrast seems likely to keep growing for it remains the destination of choice for ambitious immigrants.

So the two great powers will eventually settle into more comfortable coexistence. But they have to get from here to there. The first phone call between President Biden and President Xi Jinping last week was businesslike but cool. The relationship is likely to remain cool for a long time.

Meanwhile let’s celebrate the overwhelming likelihood that the US will pull the world out of recession this year. It is a reverse of the adage that when America sneezes Europe catches a cold. It is when America recovers, Europe will recover too. But it will take a bit longer for that recovery to spread across the continent. Europe, and to some extent the UK, still have a trudge ahead.