Decoupling - the notion that the rest of the world can weather the effects of a slowing U.S. economy - had all the attributes of a successful advertising campaign. The message was simple, clear and succinct.
One problem: It doesn't fly, or at least not yet. It might even be argued that the powerful forces of globalization make decoupling impossible.
"Global growth will decouple from U.S. growth to a greater extent than in the past," Jim O'Neill, head of economic research at Goldman Sachs, said in a September 2006 report. The United States is now a less important destination for world exports, the report said.
"Domestic demand is on solid footing in Europe, Japan and key emerging markets," it said. "The underlying shock driving the U.S. slowdown is not global in nature but is linked to a slowing U.S. housing market."
Last year, Merrill Lynch said, "A sharp slowdown in the U.S. economy in 2007 is unlikely to drag the rest of the global economy down with it." It added, "The good news is that there are strong sources of growth outside the U.S. that should prove resilient to a consumer-led U.S. slowdown."
The firm dismissed the potential fallout from a U.S. housing downturn. "The world doesn't build U.S. houses," it said.
Both Goldman Sachs and Merrill Lynch were bullish on Japan. "Global star," Merrill called it. As for the 13-nation euro area, Merrill said, "The region has a good chance of avoiding the worst effects of a U.S. slowdown."
Now for the reality check.
Japan's gross domestic product contracted at an annualized 1.2 percent rate in the second quarter, down from 3 percent growth in the first quarter and 5.6 percent in the fourth quarter of 2006.
Euro zone GDP growth was a weak 0.3 percent in the second quarter, down from an average of 0.8 percent for each of the preceding two quarters and the lowest level since the last three months of 2004.
Central bankers have been no more accurate forecasters than their private-sector brethren.
"Strong money supply, driven by buoyant credit demand, adds to concerns that consumer-price increases in the euro area will stay on average significantly above 2 percent in coming years," the Bundesbank said in its monthly bulletin, which was completed at 11 a.m. on Aug. 17.
That was after central banks had pumped $350 billion of emergency funding into global money markets and just hours before the U.S. Federal Reserve cut its discount rate.
For months, the return of inflation and the need for central banks to resist it with higher rates were a concern. The real risk, though, is deflation, compliments of the U.S. subprime mortgage mess and tightening credit standards.
"Amid all the fear generated by the U.S. subprime meltdown, one key argument against the 'sky-is-falling' camp rested with the assumption that while the U.S. economy may be vulnerable to a credit shock, the rest of the world was doing just fine," said Joseph Quinlan, chief market strategist at Bank of America Capital Management.
Well, this month, concerns that the market turmoil may spread persuaded central banks in Europe, Britain, Australia, Canada and South Korea to hold off raising rates.
Not all decoupling advocates are giving up. Asian countries' dependence on the U.S. consumer has declined "dramatically" since the technology bubble burst, said Silvia Liu, an economist in Hong Kong with Merrill Lynch. Exports of consumer goods to the United States declined to 6 percent of total Asian exports in 2006 from 8 percent in 2001, she said.
Goldman Sachs economists reiterated their confidence in decoupling in a report last Wednesday, adding that the so-called BRIC countries - Brazil, Russia, India and China - remain "key to global decoupling."
The day will come when the rest of the world can escape the pull of the $13.3 trillion U.S. economy, especially when the BRIC economies mature.
For the time being, though, it's too soon to count the Americans out.
♠ Posted by Emmanuel in Trade at 9/20/2007 01:03:00 PMEconomic pundits were nearly unanimous in predicting a slowdown in the US this year. However, many also believed that the rest of the world would be able to "decouple" from America and continue on the impressive global growth trend of recent years. Perhaps it was due to vested interests, but many of the Wall Street firms sold this decoupling story. The IMF, on the other hand, was a tad warier of it. Anyway, Michael Sesit argues here that there has been no such thing as decoupling; the EU and Japan have had their growth slowed down as the US has hit a speed bump. It would have been better though if he talked more about decoupling outside of the G7 as perhaps the intra-G7 correlation is higher than outside of it: