Why do some countries feel prosperous when the economy grows by 2%, while others feel that it fails when it grows by 5%?

Executive Summary:

Why is there a saying that China's economic growth is 5 percent, and many people think that China's economy has failed, and in the United States, it is 2 percent, and we think that the United States is back to the boom period? Different systems of national income distribution determine how people feel about economic growth. By printing money to drive up economic growth, people's sense of economic growth is inversely proportional to the speed at which money is printed. The level of debt service ratio is inversely proportional to people's sense of gain in economic growth.

1. Why is there a saying that China's economic growth is 5%, and many people think that China's economy has failed, and that in the United States, it is 2%, and we think that the United States is back to the boom?

The Beijing News reported on December 3 that Neil Bush, chairman of the George W. Bush Foundation on U.S.-China Relations, said in an interview with Chinese media during his participation in the "2023 International Conference on Understanding China" that the reality is that China's economic growth is 5 percent, but many people think that China's economy has completely failed, and that the United States is 2 percent, and we think that the United States seems to have returned to a boom period.

In fact, similar statements existed for a long time before Neil Bush raised the issue.

Our policymakers have long believed that for China to maintain stable employment, GDP growth must be maintained at 5%-6%. On March 5, 2022, at a briefing on the relevant situation of the "Government Work Report", Xiang Dong, deputy director of the Research Office of the State Council, said when talking about the relationship between economic growth and employment: "To achieve a growth of about 5.5% this year, there is a foundation for expanding employment and increasing income."

In fact, the statistics reflect this relationship as well.

In 2021, the mainland's GDP increased by 8.1% over the previous year, and the unemployment rate increased from 5.1% in January 2021 to 5.3% in January 2022.

China's GDP grew by 3% in 2022, but the unemployment rate increased from 5.3% in January 2022 to 5.6% in January 2023. Economic growth was below 5 per cent, and unemployment widened.

In the United States, unemployment can be stabilized with low GDP growth.

In 2020, US GDP fell by 3.5%, and the US unemployment rate increased from 3.6% in January 2020 to 6.3% in January 2021.

In 2021, the US GDP grew by 5.7%, and the unemployment rate fell to 3.4% in January 2022 from 6.3% in January 2021.

GDP grew by 2.2% in 2022, and the U.S. unemployment rate in January 2023 was unchanged from January 2022 at 3.4%. Dajia has seen that a little more than 2% economic growth in the United States can achieve stable employment.

Speaking of which, let's talk about what a certain amount of economic growth is, and it gives the impression that it is more prosperous, or is it more than a failure, and it is like no growth. Can this feeling be quantified, explained and judged from the data?

The Fed has linked its monetary target to inflation and unemployment only to consider the road. In other words, these two indicators are actually quantitative indicators of the countless personal feelings about economic growth. Why?

Because economic growth requires enterprises to expand production, it is necessary to add new jobs, and if there are more people participating in labor and receiving wages, consumers' incomes will increase, the unemployment rate will fall, purchasing power will increase, and consumption will be vigorous. And rising prices are a signal that stimulates companies to continue to expand production. However, labor is limited, and expanding production to a certain extent, labor is in short supply, which will lead to the unit price of wages exceeding the growth of enterprise production capacity, which will lead to the growth of purchasing power faster than the growth of production, to a certain extent, causing high inflation, and finally leading to economic overheating, damaging the profitability of enterprises.

Second, different national income distribution systems determine people's different feelings about economic growth.

The lower the unemployment rate, the more prosperous the economy, and the higher the inflation, the more prosperous the economy. But people will feel the same economic growth differently, and much more than that.

Individuals' feelings about economic growth are, of course, derived from their incomes. Therefore, the percentage of personal income in GDP determined by the distribution system, that is, the proportion of economic results distributed to workers, will of course be different.

In 2022-2023, the share of total personal income in GDP in Russia is 39%, ours is 43%, the United States is 63%, the EU is 59%, the United Kingdom is 61%, Japan is 57%. In developed countries, it is basically above 55%. Other developing countries are basically above 50 per cent. Russia was also above 50% before, and the war caused its fiscal spending to swell rapidly, squeezing individual distribution.

Suppose that when personal income is 100% of GDP and GDP grows by 1%, you can feel a 1% increase. When the percentage of personal income is 0, the economy grows by 100%, and it has nothing to do with you, because you don't feel it at all. According to this calculation, since our personal income as a percentage of GDP is 31.7% lower than that of the United States, our economic growth rate is 46.5% higher than that of the United States.

Third, through the economic growth driven by printing money, people's sense of economic growth is inversely proportional to the speed at which money is printed.

With the development of the modern financial industry, the use of credit means to motivate consumers to consume ahead of their own income level has become a means to promote economic growth. But when the means of debt are at the right level, the debtor will feel that his living conditions will improve, and the economy will be promoted. If the means of debt are too strong and exceed the bearing capacity of income, the debtor will become an ant on a hot pot, and a debt crisis will break out, and he will become a bad guy, which will backfire on the development of the economy.

We all know that increasing debt can either increase investment or increase consumption. In other words, debt can drive super-fast economic growth, but when debt-based economic growth exceeds income tolerance, people feel that economic growth is not a boom, but a failure. Therefore, we generally use the debt-to-income ratio, debt-service-to-income ratio and other indicators to observe the reasonableness of debt.

From this point of view, the lower the debt service ratio of the same economic growth, the more direct benefits of growth will be brought to people, and the better people will feel. The higher the debt service ratio, the less direct gains people will have from growth, and the worse people will feel. Economic statistics can also bear this out.

For example, Russia, which is under the dual pressure of war and sanctions, will have a GDP recession of 2.1% in 2022. In the first three quarters of 2023, it will increase by 2.9%.

Why did the Russian economy, faced with war-based spending demands and sanctions-squeezed revenues, regain growth in 2023 only after a recession in 2022?

Some say this is because Russia's defense-related industries are growing at double-digit rates, others include, for example, a large number of low-income groups going to Ukraine to fight in Ukraine and receiving high pay, families of the dead and dead receiving pensions that drive up the incomes of the families involved, and military industrial complexes that attract labor with high wages and overload them, causing workers' incomes to skyrocket.

In fact, this is all appearance. Where does the double-digit growth of the Russian military industry and the high income of combatants come from, on the basis of a quarter-down reduction in oil and gas revenues, the mainstay of Russian military spending, in 2023?

Printing money at high speed, by rapidly inflating the currency in circulation, creates false economic growth on the one hand, and redistributes economic wealth on the other, concentrating more wealth in the hands of the Russian government.

In December 2023, M2, the currency in circulation in Russia, reached 98.5 trillion yuan, an increase of 19.5% compared to 2022 and 48.5% compared to 2021. For comparison, in 2023, M2, the currency in circulation, increased by 9.7% in China and decreased by 3% in the United States.

The high growth of M2 has rapidly pushed up Russia's debt. The Central Bank of Russia no longer publishes data on government liabilities, but it does publish data on credit to businesses and individuals. The stock of credit to individuals and businesses in Russia increased by 5.4% to 93.1 trillion rubles in 2022 and increased by 31.6% year-on-year to 118.5 trillion rubles in October 2023. Among them, the balance of corporate and personal liabilities increased by 31% and 32.5% respectively.

In 2022, the stock of credit to individuals and businesses increased by 5.4%, while GDP fell by 2.1%. In 2023, it grew by 31.6% and GDP by 2.9%.

If we subtract the growth rate of M2 from the 2023 GDP growth rate at current prices of China, Russia, and the United States, we can see the real GDP growth without the printing factor. This figure is minus 9.7% for Russia, minus 4.4% for China, and 10.3% for the United States.

Fourth, the level of debt service ratio is inversely proportional to people's sense of gain in economic growth.

If we compare the relationship between household debt and GDP growth in China and the United States, you may have a deeper understanding of the fact that some countries feel prosperous when the economy grows by 2%, and that some countries feel that the economy grows by 5% and that it fails.

From 2003 to 2023, total U.S. household debt increased from $7.2 trillion to $17.293 trillion in 20 years, an annual increase of 1.7%. Americans' total disposable income increased from $6.75 trillion to $16.82 trillion, an annual increase of 4.7 percent, 1.76 times faster than debt.

China's household credit balance increased by 21.7% year-on-year from 1.57 trillion yuan to 79.9 trillion yuan. Chinese's total disposable income increased from 6.45 trillion yuan to 55.2 trillion yuan, an annual increase of 11%, 49.3% lower than the growth rate of debt.

While our economic growth, our income growth is higher than that of the United States, our debt growth is higher than theirs. The result is that Americans' debt burden is getting lighter and ours is getting heavier.

The debt-to-income ratio of our households increased from 24.3% in 2003 to 144.7% in 2023, while in Americans, it fell to 102.8% from 106.7% 20 years ago.

In fact, what is more important is not the debt-to-income ratio, but the debt-servicing income ratio. That is, the proportion of principal and interest to be repaid to the bank every year to the income. Our debt-service-to-income ratio increased from 7.6% in 2023 to 24.2% in 2023, and Americans fell to 9.8% from 10.1% 20 years ago.

For example, it helps to clearly understand the relationship between debt service ratios and economic growth. If we set our income growth rate in line with GDP. If Xiaomei's debt repayment ratio is 10%, and her annual income increases by 20% from 100,000 to 120,000, Xiaomei can spend 110,000 yuan if she pays back 10,000 yuan in the bank. Xiao Zhong's debt repayment rate is 24%, the annual income has increased by 20% from 100,000 to 120,000, and 24,000 yuan has to be repaid to the bank, and only 96,000 can be consumed. Xiaozhong's income must increase by 34%, 14 percentage points more than Xiaomei, in order to have the same income growth as Xiaomei.

[Author: Xu Sanlang]