Economic Growth: China vs. the UK (Eco4 and Buss4)

The logical place to begin this would be to ensure we’re aware of what growth actually is and how it comes about. Growth is illustrated by an increase in Gross Domestic Product, these figures are released on a quarterly basis but are likely to be re-examined and corrected as initial figures are often inaccurate. An increase in GDP is an example of short run economic growth as it shows a change in the output of an economy. This is caused by either an increase in Aggregate Demand or short run Aggregate Supply, therefore in theory an increase in any of the elements of Aggregate Demand will bring an economy growth. Okay so now that we’ve got the basic economic explanation sorted lets apply this to relevant reading for both Eco4 and Buss4.

To ordinary followers of the news the phrase ‘economic growth’ will be covered in positivity, however economists will be intrigued to understand what has caused this growth to then forecast the implications of the economic growth. In the UK growth brings scares of rising inflation, so how on earth have the Chinese managed to grow at an average rate of 9.5% over the past 10 years and only feel inflation levels of 3%? This is due to the nature of China’s growth, the Chinese have escaped the fear of inflation by ensuring that Aggregate Supply is increasing at a rate that matches that of aggregate demand. This can be achieved by increasing the quality of capital, China have tackled this by encouraging foreign investment through financial incentives such as tax allowances for foreign firms and improving infrastructure  with thousands of miles of new motorway and over 30 new airports subsequently making China a more efficient and therefore profitable country for a firm to operate in. This approach is shown by a shift to the right of the short run aggregate supply curve and therefore maintaining the current levels of inflation.

However this rapid rate of growth is finally appearing to begin to catch up on China, this is highlighted by the wage inflation that the economy is now experiencing. At first this seems strange considering the first attraction of expansion for Western firms to China was the appealingly low wage costs. However due to the one child policy the supply to the labour force has been restricted, which has left the economy nearing full capacity, this is shown by a movement of the aggregate demand curve up the vertical curve on the Keynesian aggregate supply curve.

Bringing things closer to home, as well documented in the news the UK economy is experiencing new found growth and climbing out of the deep recession of 2008. This is where the UK converse with China as our growth has been primarily powered by consumer spending and a recovery of the housing market. How does this happen though, why during a recession would we begin to start spending more money? Us as consumers have clearly taken the conscious decision to spend more and save less in other words increase our marginal propensity to spend. This decision derives from consumer confidence, we have been encouraged to feel more confident by policies introduced by Mark Carney. Such as forward guidance that gives us assurance that interest rates will not swiftly increase after loans are taken out and funding for lending which has made it easier to obtain house mortgages. Increasing the demand for houses has boosted the house markets recovery and caused prices to rise, consequently providing more confidence to consumers as we feel wealthier when we see our house increase in value. 

But there must be a catch, if recovering an economy was this simple then why would we ever worry? The consumer spending is worsening the Balance of Payments deficit because the level of imports is outweighing exports. The implications of this is that the government are forced to sell their bonds at a higher rate of interest thus making the economy more expensive to run. Secondly the issue with becoming reliant upon an improving housing market is that people will take out risky re-mortgages and cheaper loans due to the base rate of 0.5% is that if and when the housing market begins to decline then people may fall into negative equity on their property and this will cause consumer spending to come to a standstill as it is the ultimate killer of consumer confidence.  Ring any bells from 2008?

We are forever reminded of balanced diets and balanced lifestyles are the life to lead, well economies are the same, for them to operate healthily they must be balanced. Which is why China are not trying to encourage consumer spending, the current culture of China is to save almost a third of their income whereas UK consumers save as little as 5.7% of theirs. China have switched to this approach as it is seen as more sustainable method of growth. They’re promoting this policy by increasing their national minimum wage to leave people with more disposable income as consumption = disposable income X average propensity to consume. China have understood and accepted that growth will slow down with under this approach and have just released forecasted growth figures of 7.5%, but it may be in exchange for an economy that will continue to grow for years to come. Similarly the UK are also attempting this economy balancing act as Osbourne admits that an economic recovery based on debt fueled consumerism will not lead to a sustainable future. The plan is to boost and support investment end exporting business, as the UK are in the position where they can benefit from successful economies overseas and tap into their consumer market.  It poses the question of whether the UK and China could benefit assist each other with China’s newly proposed consumer market and the UK’s desire for exporting, the answer is quite possibly as Jaguar Land Rover demonstrate with their UK manufactured luxury cars receiving high demand from China. 

Submitted by Jack Murray