DECOUPLING, the theory that the rest of the world doesn’t have to catch a cold if the US sneezes, which was all the rage last year, could easily go down as one of the shortest–lived buzzwords in economic theory. As economists, analysts and wealth managers frantically look for explanations to give their clients after the carnage in the Asian markets, a new buzzword has started doing the rounds–recoupling. This one argues that growth economies or not, the the rest of world is still umbilically attached to the state of the US economy, maybe a lot more for Europe and somewhat less for Asia.
Goldman Sachs, which with its BRIC reports becomes some kind of messiah for emerging markets, has now put out an investor note titled ‘Signs of recoupling in Europe’. “Our view that the US will now fall into recession this year increases the risks to growth in the rest of the world,” it says.
This view seems to be reflected in report after report from western economists, wealth managers, analysts and media commentators, as market reports in Europe are busy writing off the ‘myth’ of decoupling. So, is it time to start worrying? Not yet. The good news is that a number of economists and Asia watchers believe that Asian economies—especially India—are still ‘safer’ havens in a downswing of the global business cycle. While Europe may not be able to decouple from an American recession, India, largely driven by domestic growth, is expected to weather any such storms more easily than others. “The US is the world’s biggest economy and events there will have a global impact. The business cycle still exists, it hasn’t been abolished in India and China. The direct linkage, via export markets, is much less for India than, say, even China. India will be slightly impacted, but overall the key driver for India will be domestic factors and what happens in the Indian economy,” says Gerard Lyons, Standard Chartered’s chief economist globally.
The bad news is that gloomy global investor sentiment, and more adherents to a recoupling school of thought, could create mood swings in the Sensex. Even here, there’s a silver lining; “You must remember that this time the retreat was extremely orderly, the processes and systems held up. Even five years ago, a shock like this would have created chaos in the stock markets,” points out Sonjoy Chatterjee, director, ICICI Bank.
So what is the argument for recoupling? It goes something like this: US’ problems last year were mostly domestic, based on housing, but as signs of recession deepen, Europe, at least will not be able to escape the ill-effects and will take a hit on domestic growth. The alternative ‘growth’ engines of China and India, despite their large domestic consumption, will not be able to fill the gap left by the US. While India may be reasonably shielded from the impact, China’s export-based economy may follow the American drummer. Stephen Roach, chairman of Morgan Stanley Asia, an adherent of the view that you can’t have both globalisation and decoupling in the same world space, pointed out in his Davos blog that the US consumed over $9.5 trillion in 2007 - fully six times the combined consumption totals for China ($1 trillion) and India ($650 billion).