Rebalancing demand, from investment and exports to domestic consumption

This ramification is highlighted by the consistently high domestic absorption (private and public consumption and investment expenditures to GDP ratio) and the allocation switch from investment to consumption.

To achieve this, China must increase domestic consumption s share of GDP.

No wonder domestic consumption cannot grow in a manner commensurate with GDP.

The financial services sector, which has been the fastest growing segment of the economy, will shrink.

Much has been made of domestic consumption as a driver of Chinese growth in the future.

To be sure, China s domestic consumption is not as high as it should be, standing at 49 of GDP in 2008, with household consumption accounting for only 35 .

If Asian domestic consumption increases, for example, global economic growth will depend far less on over consumption by debt laden Americans.

For China, this puts consumption in the range of 40 45 of GDP.

So a shift to greater domestic consumption was inevitable anyway.

There are other instruments available for increasing domestic saving and reducing consumption besides the fiscal balance.

Low hanging fruit Consumption. Private consumption accounts for only about 37 of China s GDP the smallest share of any major economy.

First, the production chain must shift from export dependence toward domestic consumption.

With the financial crisis, the Chinese economy s necessary adjustment towards more domestic consumption has become far more urgent.

Half of India s growth has come from private consumption, and less than 10 from external demand by contrast, 65 of China s real GDP growth comes from exports, and only 25 from private consumption.

All of these changes will increase household consumption in both the short and long term.

Both countries external sectors have clearly been hit hard, while domestic consumption is stagnating.

During the boom, US consumption rose to more than 70 of GDP.

Whether Kuroda s assault will bolster domestic consumption and investment remains to be seen.

Today, it is private consumption in the household sector (70 of GDP) that is in trouble.

From now on, consumption must grow much faster than GDP.

At nearly 70 of GDP, consumption in the US is too high.

Rebalancing demand, from investment and exports to domestic consumption

Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate.

But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving.

Moreover, China s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings.

Households are over indebted and must save more.

Nor has domestic consumption been sufficiently expanded, leaving economic growth overly dependent on exports and foreign investment.

Natural gas is procured from Russian Gazprom (roughly three fourths of domestic consumption) and from Norwegian companies (most of the remaining one fourth).

The Board endorsed the plan to publish both preliminary and final PPPs and to publish in stages for consumption and the full GDP.

Official estimates put annual GDP growth at 6.5 in 2018 2022, while Peking University s Michael Pettis, for example, regards 3 4 growth as consistent with continuous rapid consumption growth and the targeted increase in consumption s share of GDP.

Transforming China from an export driven economy to one that relies on domestic consumption requires two fundamental reforms.

This is particularly important for poorer and smaller developing countries in which domestic consumption and investment is a poor substitute for global demand.

Its imbalances have gotten worse as well, with the investment share of GDP approaching 50 and private consumption falling below 35 of GDP.

The challenge is to get corporations to invest in developing countries, but for purposes of producing for local consumers.

But domestic demand, which determines imports, consists not only of consumption, but also of fixed asset investment.

In South Africa, the number of seized meth laboratories has consistently gone up for the past five years, while domestic consumption has increased.

This implies that the pre crisis level of GDP simply was not sustainable, as it required capital inflows in excess of 20 of GDP to finance outsize consumption and construction booms.

Its future growth will have to be based more on domestic demand than on exports, which will require increases in consumption.

The hard part of fully realizing potential growth is shifting the composition of domestic demand from consumption to investment without adding leverage.

Decomposition estimates of GDP expenditure growth in 2004 indicate that Egypt, Jordan and Yemen experienced consumption led growth.

In the medium and longer term, the expected and hoped for increase in China s domestic consumption should be the most dynamic element of demand, with export growth continuing to slacken and investment remaining except for brief periods below 50 of GDP.

But this restructuring will tend to reduce, not increase, import demand, as exports and investment are much more import intensive than consumption.

As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015.