Has the World Decoupled from the U.S.?

Is the rest of  the world heavily dependent on the fate of the U.S. economy, or can other countries, for the most part, withstand a housing led slowdown in the U.S.?:

The Global Question: Who Needs the U.S.?, by Peter Gumbel, Time: ...Nicole Leibinger-Kammüller ..., chief executive of Trumpf, a family-owned machine-tool firm in Germany, has watched orders from the critical U.S. market slow significantly in the past few months. But while the housing-bled U.S. economy has been sluggish, and the dollar weak, it's all proving quite manageable. "We can feel the U.S. slowdown, but it's not unsettling. There's no crash," Leibinger-Kammüller says. Trumpf's sales of its metal-cutting machines elsewhere--to Saudi Arabia, to Singapore and especially in Germany--continue to rack up double-digit growth rates. ...

Economists and policymakers ... have been furiously debating whether the world has "decoupled" from the U.S. economy. The U.S. constitutes about 28% of global gross domestic product (GDP) as measured in dollars, and it accounted for one-fifth of worldwide growth from 2000 to 2006. When the U.S. faltered in the past, the rest of the world staggered. And certainly there are signs of fatigue. A cooling housing market slowed U.S. GDP growth to 2% in the third quarter...

Jim O'Neill, London-based head of global economic research for Goldman Sachs, says that even if the U.S. economy remains soft for much of the year, "we're pretty confident that the rest of the world will withstand it." ... At the German Engineering Federation in Frankfurt, chief economist Ralph Wiechers concurs. "It used to be that the U.S. economy supported the world economy," he says. "Now it's the other way around." ...

Still, even the biggest optimists concede that nobody would escape unscathed if the U.S. economy were to hit a wall. Its big local trading partners, Mexico and Canada, would probably be hurt the most, but the reverberations would be felt worldwide. The key bone of contention is the extent of the suffering.

Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. ...

Stephen Roach ... has long warned about the dangers of flagging U.S. demand. Now he's concerned too about signs he sees of a possible Chinese slowdown--one reason why he thinks global growth this year will be "significantly below what most are expecting."

So will it be a "happy slowdown," as Goldman's O'Neill predicts, or a meltdown? You can have your own debate; in the meantime, here are some of the key issues:

THE U.S.: GO YANKEES What economists are struggling to predict is how pervasive the impact of this housing slowdown will be on the rest of the U.S. economy, and abroad. Perhaps most surprising, American consumers are continuing to spend...

ASIA: SPENDERS WANTED Purchases by Asia's rising middle class have made the region far less dependent on exports to the U.S. to power the economy. Today only 16.5% of Asia's exports are sold in the U.S., down from 25.5% in 1993. Yet there are significant regional differences. ...

EUROPE: HOLD ON It's the euro that has so far borne the brunt of the dollar's decline: it rose about 10% last year against the greenback. A stronger currency makes European exports more expensive for foreign buyers. But that hasn't prevented Germany from notching up its biggest trade surplus since the fall of the Berlin Wall 16 years ago. The good news is that buoyant exports have boosted business confidence in Europe's biggest economy and led to an unexpectedly strong increase in domestic demand...

Can Germany take the load off the U.S. and the rest of Europe? Growth in the 13 nations that have adopted the euro is expected to be 2.6% in 2006, unusually strong for the growth-challenged Continent... "Europe is going to have a great year," reckons Harvard professor Kenneth Rogoff, former chief economist at the International Monetary Fund...

Comments

[calmo]

Ok, I have not been furiously debating whether the world has "decoupled" from the U.S. economy. The U.S. constitutes about 28% of global gross domestic product (GDP) as measured in dollars, and it accounted for one-fifth of worldwide growth from 2000 to 2006. largely because my sensitivities are greatly offended by numbers like 28% which I know has not cleared the desk of Stephen Roach.
No, it's the accuracy even of Roach who has claimed some horrific number (like 96% but don't hold me to this number)in the past of our famously imbalanced US centric global economy.

Ok, I will allow "a quarter".
But I would still not be "furiously" debating. It's not that I am imperturbable, but that I need to see this debate articulated through something other than a "family owned company with international branches" and concluding that "we need to lay our eggs in many baskets" or some such drivel.
I need to see the rise of China and the shift of Chinese exports to Europe. I might get somewhat furious if the transnational component of that Chinese export was further articulated. A spec of ferocity might occur if the growth of Chinese domestic demand was examined. Are those international trade figures all that much to consider?
Yes, this audience needs to know which portfolio adjustments to make. And the answer is diversify (away from the US) and spare the reader the ferocity.

[nihil obstet]

Just a cranky comment: why do I keep reading about the seemingly insatiable appetite of American consumers for imported goods rather than about the continuing de-industrialization of America, which makes imported goods the only option on a wide range of products? It does not inspire confidence (or even minimal respect) for economic policy makers when policy discussions locate the problems in the fecklessness of the Walmart shopper.

[john c. halasz]

calmo:

According to the CIA factbook, world product in 2005 was ~$43 trillion in U.S. $ and ~$66 trillion ppp.

[Movie Guy]

Peter Gumbel, TIME - "Leibinger-Kammüller, the boss at Trumpf, certainly hopes so. Trumpf's continued strong sales growth is in large part the fruits of a geographical diversification: it established a subsidiary in the U.S. as long ago as 1969 and opened an office in Japan eight years later. It's currently investing in facilities in the Czech Republic, Mexico and South Korea. "Our main competition used to be in the U.S., but it has disappeared there, and now it's Japan," Leibinger-Kammüller says."

That's the only reference that focused attention on the effects of U.S. offshoring or reloction of production to overseas markets. Peter Gumbel, though, didn't discuss the matter of lost U.S. GDP value-added production, net GDP growth from such lost production, or the consequences of declining wage opportunities for such displaced workers.

The U.S. housing slowdown is only part of the problem for U.S. GDP growth. Unfortunately, Gumbel didn't bother to discuss the rest of the issues. Nor did he note that the U.S. housing growth and unsustainable retail run-up was a poor substitute for lost value-added production growth in other U.S. industries.

Has the world decoupled from the U.S.? Not yet. There are still a few more pieces of industries to give away while U.S. median income continues to decline. As long as U.S. consumers continue to make purchases, the USA will remain a viable market for global goods.

[anne]

Reading international investment markets, my sense is that the American economic influence is gradually lessening, which I would argue is contributing to relative economic and market stability. I find more economic influences on the internatiuonal economy to be desirable.

[Oh, for them what likes to lose money, pay close attention to Morgan Stanley's own Stephen Roach. Neither Morgan nor Stanley lose however....]

[john c. halasz]

Movie Guy:

Check out the IMF chart posted at DeLong's.

[yan]

I don't see how the dichotmous notion of "coupled" or "decoupled" is more meaningful than the quantitative relationships that exist. US GDP accounts for 20-28% of global GDP, depending on whether we PPP adjust or leave it in doallar terms. The coupling to global GDP is accomplished by means of imports ($1.8 trillion), exports ($1 trillion) as well as financial flows in both directions.

If 20-28% of any economy were to slow that would have some impact on the whole, depending on the coupling factor between the part and the whole. Just because the global economy can withstand the slowdown in US GDP growth that we witnessed in the latter half of 2006, doesn't mean it can tolerate a US recession.

[Movie Guy]

john c. halasz,

Nice chart from an IMF paper. Thanks.

There are few more in the back of the November IMF paper, but most deal only with the EU.

Appreciate the heads up.