Globalisation Makes Decoupling Impossible
DECOUPLING, THE notion that the rest of the world can weather the effects of a slowing US economy, had all the attributes of a successful advertising campaign. The message was simple and clear. One problem: It doesn’t fly. It may even be argued that globalisation makes decoupling impossible. “Global growth will decouple from US growth to a greater extent than in the past,” Goldman Sachs said in a report. The US is a less important destination for world exports, the firm said. “Domestic demand is on solid footing in Europe, Japan and key emerging markets,” Goldman said. “The underlying shock driving the US slowdown is not global in nature, but is linked to a slowing US housing market.” “A sharp slowdown in the US economy in ’07 is unlikely to drag the rest of the global economy down with it,” Merrill Lynch said last year. “The good news is there are strong sources of growth outside the US that should prove resilient to a consumer-led US slowdown.” Both Goldman Sachs and Merrill Lynch were bullish on Japan. As for the euro area, Merrill said, “The region has a good chance of avoiding the worst effects of a US slowdown.” Now for the reality check. Japan’s GDP contracted an annualised 1.2% in Q2, down from 3% in Q1 and 5.6% in Q4 of ’06. Euro-area GDP growth was 0.3% in Q2, down from an average of 0.8% for each of the preceding two quarters and the lowest since the last three months of ’04. German GDP slowed to 0.3% in April-June, down from 0.5% in Q1. French GDP was also 0.3%, while Italy grew a measly 0.1%. Central bankers have been no more accurate than their private-sector brethren in reading economic tea leaves. “Strong money supply, driven by buoyant credit demand, adds to concerns that consumer-price increases in the euro area will stay above 2% in coming years,” Germany’s Bundesbank said. Duh! That was after central banks had pumped $350 billion into global money markets. For months, the return of inflation and the need for central banks to resist it with higher interest rates were a concern. The real risk, though, is deflation, compliments of the US subprime mortgage mess and tightening credit standards. “Amid all the fear generated by the US subprime meltdown, one argument against the ‘sky-is-falling’ camp rested with the assumption that while the US economy may be vulnerable to a credit shock, the rest of the world was doing fine,” says Joseph Quinlan, chief market strategist at Bank-Am Capital Management. Concerns that the market turmoil may spread persuaded central banks in Europe, UK, Australia, Canada and S Korea to hold off raising rates. Decoupling proponents back their claims with data. Yet, markets were overcome by banks’ hesitancy to extend credit to those they didn’t trust. Not all decoupling advocates are giving up. Asian countries’ dependence on the US consumer has fallen since the tech bubble burst. Goldman Sachs economists recently reiterated their confidence in decoupling, saying BRIC countries remain “key to global decoupling.” The day will come when the rest of the world can escape the pull of the US economy. For the time being, it’s too soon to count the Americans out