Research

The World Bank on May 19, as it does every six years, released the results of the most recent International Comparison Program (ICP), which measures price levels and GDPs across 176 countries.  The new results are striking.  It is surprising that they have received almost no attention so far, perhaps overshadowed by all things coronavirus.

For the first time, the ICP shows China’s total real income as slightly larger than the US.  It reports that China’s GDP was $19,617 billion in 2017, in Purchasing Power Parity (PPP) terms, while the United States’ GDP stood at $19,519 billion.

At the start of the year, the economic mood was tending toward the optimistic.  True, growth had slowed a bit in 2019. US GDP grew 2.3 % in 2019, down from 2.9 % in 2018.  World growth was weak in 2019 as well: 2.9% according to IMF estimates, down from 3.6 % the year before.  Still, there had been no recession.  And forecasts as recently as January called for world growth to rebound in 2020.

As long as the German economy was doing well, as it was during the recovery from the 2008 global financial crisis, there existed a coherent rationale for German fiscal austerity.  The national commitment to budget discipline was enshrined in the 2009 “debt brake,” which limits the federal structural deficit to 0.35% of GDP, and by the 2011 “schwarze Null” (that is, “black zero”) policy of fully balancing the budget.  Indeed Angela Merkel’s government proudly achieved a balanced budget in 2012 and surpluses in 2014-18.

With unemployment low and growth relatively strong, fear of overheating the domestic economy was a legitimate counter-argument against the other countries that were always urging Germany to undertake fiscal stimulus.  They wanted more German spending, which would reduce its current account surplus (a huge 8-9% of GDP in recent years) and spill over into demand that would help other euro members, especially those to the south.

Newly announced GDP data give a preliminary estimate of 6.5 % in the 3rd quarter of 2018, relative to Q3 of 2017. The growth rate had been 6.7% previously.