For both the U.S. and Europe, that growth will be underpinned by unprecedented levels of government recovery funding. In the U.S., it is already underway, and in mainland Europe, it should soon start.

China’s return to growth started early as a result of the remarkable speed with which it brought Covid-19 under control and prevented further outbreaks. It looks likely it might even beat the figure of 8% being widely discussed lately. China’s strong April export figures are explained by growth in demand from the U.S., plus Covid-19 issues elsewhere, particularly in India, meaning buyers have returned to China to be sure of supplies. These two trends look likely to be around for some time.

This spurt in growth in some markets is also supported by large numbers of consumers who have made savings over the last year. The leather industry may find that experiences will be favoured over goods; but anyway, the new “Roaring Twenties” may be measured in months rather than years. There are some longer-term trends coming into play, even if we stave off inflationary pressure driven by the recent surge in the prices of metal and agricultural commodities (the latter has been costing leather market share).

China itself has been at a crossroads of change since Xi Jinping came to power because its economy has started to mature alongside a fast-ageing population. The shift from exports as the dominant growth factor to domestic consumption has been steadily underway for some time, and rising labour costs have already pushed quite a lot of low-cost manufacturing to places like Vietnam and Bangladesh. These fast-rising costs reflect the success of strong economic growth over two decades, plus better educated young workers seeking better wages, along with long overdue social benefits. We had a foretaste of the looming democratic changes back in 2012 when we saw a decline in the working population aged 15-64. It become clear that future economic wealth and associated health and pension costs would not be funded by an ever-expanding population, as this emerging economy hits a developed world problem more associated with rich economies such as Japan.

The Chinese new five-year plan is called the “Dual Circulation” Strategy, and is essentially about China becoming less dependent on exports and overseas technology and employing the attraction of its huge domestic market to keep overseas companies interested. Recent announcements from Volkswagen on the strength of its car sales in China in the first quarter of 2021 are an example of how many international brands such as Nike, Apple and H&M have come to rely on the Chinese consumer.

The Dual Circulation strategy is supposed to help China in the new “Westphalian Order” (worth looking up this 1648 European state-of-affairs if you are not familiar) that we are seeing as China and the U.S. face off with very different ideas. The dual circulation has the Chinese economy at the centre, with a more fragile, hostile and fragmented economy in the outer circulation. While China does not want to be isolated, it will control the touch points. The Belt and Road policy has evolved to be part of this, and Chinese vaccination diplomacy has been deployed to widen China’s global sphere of influence. Western countries hoarding vaccines or squabbling over them, as Europe has done, has greatly helped.

The control of contact points is partly intended to advance China’s technological research and development, which has started to be viewed as a threat elsewhere. China will need to use such technology to maintain economic prosperity as the large numbers of younger employees will not exist to help drive the economy and pay for the healthcare and pensions of the old. The latest overall population figures show a continued decline in growth to its lowest ever level, albeit it numbers have sneaked past 1.4 billion.

China’s GDP growth will likely stabilise at lower levels. It should have been an opportunity for India, but what looks like pretty gross mismanagement of the pandemic, means it has been missed. Given their track record over the last fifty years and the recent attacks on their multicultural foundations which offered a major global strength, one wonders if India can recover in even a medium time frame.

So, while we are starting to see a stronger worldwide exit path from the pandemic driven by savings, government expenditure, low interest rates and investment in greener economies, we see some major hurdles ahead that are more structural than worries about high national indebtedness, the danger of inflation, erratic vaccine roll out or a temporary peak in commodity prices.

The future world looks both complex and troubled.

Mike Redwood
May 12, 2021

Follow Dr Mike Redwood on twitter: @michaelredwood

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