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|  | Riccardo Sorrentino, born in 1964, has worked at Il Sole-24 Ore since 1992. In the past years, he has attended several international summits, including the Palermo G-7 of Finance Ministers and Central Bankers in 2001, and the WTO conferences of Cancun (2003) and Hong Kong (2005) and he has covered several G-10 central bank meetings at the BIS and ECB press conferences. As a special correspondent, he has been in The Netherlands; in the US; in Iceland, in Hungary, in Singapore, in Indonesia, in India, in Norway, in Thailand, in Pakistan, in Armenia. In the 2003-2004 winter and in the 2006 summer, he worked at Il Sole 24 Ore's North American bureau in New York. |
| | riccardo.sorrentino@ilsole24ore.com |
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| United States and Rest of World: decoupled, or not? |
| November 2, 2007 |
Don't be deluded by the US growth in the third quarter, an astonishing +3,9% in annual rates. The United States economy will slow down soon. Even the Federal Reserve admits it. The housing sector is weak, and the whole economy becomes more and more sluggish. The rest of the world, usually, follows the American lead, but so far there have been signs of decoupling. Global economy has become multi-polar, say the economists. Today there are many other engines of growth, many countries will be able to offset, at least partly, the slowing effect from United States. There will be some spillovers, of course, but less than in the past.
FROM CHINA TO SWEDEN
Is it true? Almost. Many countries continue to grow. Japan and China are the most striking examples, both from Asia. And Asia turns out to be the economic area that will be less affected than others by the US slowdown. But several economies, even in Europe, can be optimistic about the future: in Sweden, the Riksbank has just raised the official interest rate, and more are to come. This is not a monetary policy of a slowing economy.
LOOK AT CENTRAL BANKS
The global landscape is very variegate. Let's look at the monetary policy to understand what is happening. In many countries interest rates could be raised, not decreased. A cut is a sign that prices are overheating and, of course, this is not always the effect of a fast growth; nevertheless an expansive monetary policy is the indication that the central bank wants to cool down a rapid economy and can do it. In Europe, beside Sweden, interest rates could be raised in Norway, in Czech Republic and in Poland. In Latin America, Chile, Colombia and Peru are good candidates too. In Asia-Pacific region, China, Hong Kong, Australia, Taiwan, even Japan could soon face a tighter monetary policy.
THE GROWTH OF ASIA
Asia is possibly the most interesting area. There are reportedly many concerns, between investors, about the soundness of these economies, but many analysts think - as Frederic Neumann at Hsbc wrote last august that «economic fundamentals are generally robust across the region». Why? Because «the region has decoupled to a surprising degree from US demand conditions, so that even if the American economy were to slow down further, Asia should only be mildly affected».
A CONSENSUS
August is far away. Something has changed? Maybe not. The decoupling is not a short-term phenomenon, but a structural one: «We have frequently argued that emerging markets growth is a stabilizing factor for the world economy. As a result of our views and the views of others a consensus hypothesis has been developing holding that emerging markets can decouple from developed country performance», wrote Guillermo Mondino at Lehman Brothers.
DOUBTS ABOUT LATIN AMERICA
Still in Latin America things could be different. «A particularly interesting research project led by Ernesto Talvi at the Inter-American Development Bank shows that while Latin America is growing at a pace not seen in a long time, and in a more sustained fashion too, this growth is almost entirely driven by a very strong common cycle», said Mondino. This cycle is «driven by factors exogenous to the region: (i) world growth; (ii) commodities; (iii) low US high yield credit spreads and low interest rates. The conclusion, rather than the traditionally optimistic one that domestic macroeconomic policies are much improved, is rather that those changes have been endogenously determined by favourable global conditions».
ENGINES TOO WEAK
The chief economist at Lehman, Paul Sheard, is even more sceptical: he doubts that the world is really decoupling from US. It's a matter of degree, he wrote, adding: «The US is as important as ever, if not more so». The import share of US GDP has steadily increased from around 6% in the early 1980s to around 17% now; emerging markets, particularly economies such as China and India, are either too small in relative terms or still too dependent on export growth, much of it to the US, to withstand a US slowdown now; and «Japan shows no signs of generating strong domestic demand growth».
THE ROLE OF FINANCIAL MARKETS
Another consideration is the role of financial markets. «"Globalization" of finance and information means that even an idiosyncratic shock in a large economy such as the US can morph into a common disturbance via financial market spill-over effects and sentiment contagion effects. The reverberation of the US sub-prime shock to the UK and European financial systems, and subsequent tightening of financing conditions, is a case in point», wrote Sheard who is not so optimistic as the consensus: «If the US economy slows markedly as we expect (to an annualized pace of 1.5% in the first half of 2008), the odds are against the rest of the world being able to "decouple"».
A NON LINEAR RELATIONSHIP
Is a matter of degree, stressed Sheard, and Stephen Jen, at Morgan Stanley, agreed: «Our view is that, while there is no doubt that the US is still the single most important economy in the world, and that the performance of its economy will have meaningful effects on the Rest of world, we believe that the Rest of world is likely to be particularly resilient to another prospective soft patch in the US. A recession in the US, however, would spell serious trouble for the resto of world. This non-linear relationship between the US and the rest of world puts more focus on the fate of domestic demand in the US».
THE GHOST OF INFLATION
A ghost, meanwhile, stirs on the global economy: inflation. Everywhere prices are going up, following the lead of energy and food sectors that are not immediately manageable by monetary policy. Still, Central Banks cannot ignore those restraining inflation pressures: later, they will push all other prices up. In any case, the subsequent tightening - even a moderate one - or the inflation will both have the same effect: they will slow down the global economy. |
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