Stockbee

Nouriel Roubin has an interesting take on why the world growth in dependent on USA and why the other economies are not going to 'De-Couple From the Coming U.S. Growth Slowdown'

If a U.S. slowdown is not the issue (but rather the extent of it), the next most crucial and important issue becomes whether the rest of the world will de-couple from the U.S. slowdown or not, i.e. whether Europe, China, Japan and other emerging market economies will be able to continue to grow at a sustained rate if the U.S. economy slows down or whether the U.S. slowdown will drag the rest of the world into a sharp global growth deceleration.


The current consensus in financial markets – as expressed in the analysis of many leading investment banks – is that the U.S. slowdown will lead to a de-coupling of the rest of the world from the U.S. slowdown, i.e. the rest of the world will maintain its high growth rate. The de-coupling view is based is based on the following arguments:


1. There is a very strong growth momentum in four major Asian economies – China, India, Japan and South Korea – and this momentum is supported by rapid and resilient growth of domestic demand. Thus, while a U.S slowdown would not be a positive, its impact on Asian growth will be very modest. And if these four major Asian economies keep on growing fast, the rest of Asia will also weather a US slowdown.
2. Many economic indicators from Europe – especially but not only Germany – suggest that economic growth in Europe and especially the Eurozone – is recovering; initially the recovery in confidence and activity was limited to the corporate sector but the recovery is now extending to the household sector. Also, since exports from Europe to the U.S. represent only 3% of European GDP, a US slowdown will have only a very limited effect on European aggregate demand via the trade channel.
3. Various private sector leading indicators measure of the global economy – such as the Goldman Sachs Global Leading Indicator index – suggest a clear leading slowdown in the U.S. but still a strong leading momentum in the rest of the world.

Do these de-coupling arguments make sense? Will thus de-coupling occur if the US slows down? My view is again very much out-of-consensus: I believe that the world will not decouple from a U.S. slowdown and that a sharp U.S. slowdown will lead and be associated with a global slowdown.