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PARIS: A looming recession in the United States poses a vital
question about recent changes in the global economic landscape: has
the rest of the world broken its dependency on the US motor?
Put another way, and to use one of the
most familiar rhetorical questions in economics, when the US economy
sneezes does the world still catch a cold?
Most private sector economists believe the
United States is heading inexorably towards a period of contraction,
with financial market turmoil and weak data for jobs, housing and
consumer spending painting an increasingly bleak picture.
Last week, US Treasury Secretary Henry
Paulson referred to a “sharp” economic downturn, the OECD said
the US economy was “essentially going sideways” and former
Federal Reserve chairman Alan Greenspan warned of the worst
financial crisis since World War II.
Amid a hailstorm of such dire forecasts,
the fast-growing economies of Asia and the still-dynamic European
area represent the best hope of avoiding a severe global slowdown
or, in the worst case scenario, a global recession.
The outcome is likely to depend on the
extent to which the rest of the world has “decoupled” from the
US economy, which makes up about a fifth of world gross domestic
product according to 2007 IMF figures.
For proponents of decoupling, the world
economy is now less dependent on the United States than before
because of development in China and India, increased intra-Asian
trade and a more vigorous European economy.
“In practice, the world has tended to follow
the US,” John Williamson, a senior fellow at the Peterson
Institute for International Economics, told AFP, recalling how the
most recent recession in the United States in 2001 pulled Europe
down with it.
The idea of a complete decoupling, in which a US
slowdown had no impact on the rest of the world, is clearly
implausible given the interdependent, linked-up nature of the
world’s modern globalized economy.
It was in reference to this latter idea last
week that IMF Managing Director Dominique Strauss-Kahn stated that
there “is no decoupling between emerging economies and developed
economies.”
OECD Secretary-General Angel Gurria, speaking at
the same conference in Paris, said he didn’t “believe in
decoupling.”
Williamson stressed that decoupling can also
refer to the idea that the rest of the world, albeit growing at a
slower rate, would be able to pull along a contracting US economy
rather than be dragged down with it.
This idea implies a fundamental change in the
gravitational forces that shape the world economy.
“It’s very important to recognize that
decoupling can be used in two different senses,” Williamson said.
He believes the growth of Asian economies
provides an autonomous stanchion for the world economy that did not
exist in the same way in times of previous economic difficulty.
This time, with help from Asia, “any US
recession is going to be much shorter and shallow,” he added.
Charles Wyplosz, a professor of economics at the
Graduate Institute of International and Development Studies in
Geneva, says the “change from the past is the emergence of Asia
and right now it has been doing well in mitigating the US
slowdown.”
He added however that “the question is not
whether coupling or decoupling exists, it’s how much the US is
going to affect the rest of the world.”
“It seems to be pretty obvious that if the US
goes into recession the rest of the world is not going to go
unhurt.”
The dollar, which has fallen to record lows
against other currencies, is also set to hit Asian economies and is
part of the “coupling” effect, Wyplosz said.
The weak dollar makes US exports more
competitive and reduces demand for foreign-made products in the
United States.
Overall, “the good news is the autonomous
source of growth in Asia,” he added. “It (Asia) is going to be a
locomotive, but a tired one.”
Given the importance Europe and Asia have now
assumed in powering the global economy, economists and investors
will be scouring the horizon for any sign of contagion from the
United States.
Acting chief OECD economist Jorgen Elmeskov said
last week that there was no evidence yet of a slowdown in non-member
countries of the Organization for Economic Cooperation and
Development.
The OECD counts all of the world’s developed
industrial powers as members, but not China, India or other emerging
giants.
Elmeskov cautioned however that there “must be
limits as to how long” this could continue and whether the non-OECD
could really decouple from OECD.
The subject of decoupling was a hot topic at
this year’s World Economic Forum in Davos, Switzerland, where
optimists and skeptics faced up during an early round-table
discussion.
“There can never be a decoupling from the US
economy but the magnitude of the impact will not be what it was in
the past,” said Indian Trade Minister Kamal Nath, pointing to the
two “engines” of India and China.
Stephen Roach, Head of investment bank Morgan
Stanley in Asia and a known pessimist, countered that he was
optimistic about growth in Asia for the future, but the idea they
could power the world economy on their own could “turn out to be a
fantasy.”
-- AFP
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