New research from the IMF suggests that business cycles in the U.S. aren't exported to other countries to the that some analysts have claimed. Here's a summary of the results:
The U.S. Impact -- Averages over 1970-2005
- A 1 percentage point decline in the U.S. growth rate coincides with a 0.16 percentage point decline in growth in other countries
- A 1 percentage point decline in the euro area's growth rate coincides with a 0.10 percentage point decline in growth in other countries
- A 1 percentage point decline in Japan's growth rate coincides with a 0.11 percentage point decline in growth in other countries
- The size of the spillovers from the U.S. to the rest of the world seem to be growing over time
- In the past 20 years or so, economic ills moving from one country to another seem to be playing a more significant role than common global shocks
David Wessel has the details:
Why U.S. Economic Ills Aren't As Contagious as Thought, by David Wessel, WSJ: An old cliché holds that when the U.S. economy sneezes, the rest of the world catches a cold. Now comes the International Monetary Fund to say that it ain't necessarily so. ...
The logic behind the old saying is clear. The U.S. accounts for slightly less than a third of global economic output at current exchange rates, and about a fifth adjusted for local purchasing power.
The U.S. imports more than any other country, sucking in about a fifth of all globally traded goods. ... U.S. financial markets are by far the largest in the world, representing 40% of global stock-market capitalization and nearly half of all private debt outstanding.
All five U.S. recessions in the past 30 years were accompanied by recessions elsewhere in the world. No surprise there, given that U.S. imports usually shrink sharply during a downturn. Latin America usually feels the most pain. It sends more of its exports to its rich northern neighbor ... than most other regions do.
But IMF economists, in an essay titled "Decoupling the Train?" ... say the relationship isn't as simple as those facts suggest. ... Contrary to the cliché, downturns abroad have been considerably smaller than the U.S. recessions or slowdowns in growth. On average, a one-percentage-point decline in U.S. economic growth is associated with a 0.16-point decline elsewhere, though the impact is larger in Mexico and Canada, which are heavily dependent on exports to the U.S.
But the size of the spillovers ... from the U.S. to the rest of the world seem to be growing over time, probably because the U.S. is increasingly integrated with the global economy...
Of course, when two things happen at the same time, it doesn't mean one causes the other. In fact, as the IMF economists note, the synchronization of various economies in the 1970s and early 1980s probably reflected a common reaction to surging prices, rather than a disease spread by the U.S. to others. But in the past 20 years or so, economic ills moving from one country to another seem to be playing a more significant role than these common global shocks.
Financial markets also are more tightly linked than ever... One gloomy fact: Correlations among markets are stronger during bear markets and recessions. "This may help explain why global contractions tend to be more highly synchronized across countries than global expansions," IMF economist Peter Berezin writes.
Recent research suggests the U.S. plays a key role in propagating financial shocks. One study pins about 26% of the variation in prices of European financial assets of all sorts (and a whopping 50% for stocks) on the U.S. Only 8% of the variation in U.S. asset prices can be traced to Europe.
All this sounds ominous at a time when the U.S. economy has just ended its fourth consecutive quarter with growth below 3%...
But the IMF economists ... find an unexpected silver lining: The current weakness of the U.S. economy stems largely from housing woes -- and housing is less global than, say, computers and other parts of the U.S. economy. That is good news for the rest of the world.
If the current U.S. slowdown were driven by a sinking stock market or by widespread dissipation of confidence, the impact on the rest of the world would be bigger. ...
Sometimes a sneeze isn't contagious.