THE BOTTOM LINE
- The U.S. and China arguably function as anchors for global growth, given the size and relative stability of their economies. Yet these two nations are trending in different directions, as evidenced by capital market volatility since Q2, the weakness across many emerging markets (EM) and the strength of the U.S. dollar.
- Both countries continue to see strong growth, with nominal GDP rates of close to 6% and 10% respectively. though global growth has slowed somewhat this year.
- But the trajectory of U.S. growth has been upward since 2017, with nominal GDP at post-crisis highs. In contrast, China’s growth trajectory this year has been downward, with nominal GDP growth retreating slightly to below 10%.
- Brandywine Global‘s Francis Scotland, Director of Global Macro Research, sees this divergence as a major driver of the dollar’s recent strength, the rise in U.S. Treasury yields and the decline in Chinese bond yields – and of the movements of the U.S. dollar price of the Chinese offshore yuan.
- In EM economies, Scotland notes that this combination, in concert with higher oil prices, has proved overwhelming.
- The backdrop of U.S. – China relations may be a part of the picture, according to Scotland: “The impact of the trade war on global growth is hard to calibrate, but it seems to have exaggerated the growth divide even more.”
- That’s why policy changes in either country which affect their relative growth could be key components of the behavior of financial markets over the next year. According to Brandywine Global’s Scotland, “In our view, policy differences are the main drivers between America and China”.
All data Source: Bloomberg as of November 1, 2018, unless otherwise noted.
 Nominal GDP is defined as growth in GDP before taking inflation into account. This can differ from inflation-adjusted GDP figures, which are often described as “real GDP”.
 Source: Brandywine Global, based on J.P. Morgan Global Composite PMI
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.