One of the big themes that the financial media seized on early this year was how the global economy was set to “decouple” from the U.S. In the past, the United States had been the sole engine of economic growth, but as emmerging markets in China, India, and Brazil have exploded, the rest of the world is becoming less reliant on US growth.
But recent events are beginning to poke holes in this theory as Europe begins to slump and even China begins to show weakness in the face of soaring inflation and an export slowdown. Morgan Stanley economist Richard Berner details why and how the recoupling is happening, and why its bad for the global growth picture:
Global growth is slowing, reflecting spillovers from the US slowdown, tighter financial conditions, and the response to rising inflation in EM economies… while European growth accelerated to about 2% annualized in the first quarter, it looks to be slowing sharply to 1% or less in the current quarter. In the UK and the Eurozone, however, this slowing is only in line with our forecasts, and we think both the Bank of England and the ECB welcome such slowing to help them rein in inflation. In Asia, the jump in inflation has for some economies like India triggered monetary tightening and a stronger currency that are slowing growth.
Emerging markets were able to buck the recessionary trend in the U.S. for a while, but as the dollar weakened, US demand flagged, and commodity prices sky-rocketed, and they are now beginning to feel some pain. And this isn’t just bad news for emerging markets. Export growth has played a big part in keeping the U.S. out of recession, and as global growth slows, the U.S. might suffer:
For the US economy, such slowing contrasts with last year’s story. Strong global growth then helped keep the US economy out of recession, as US net exports added a percentage point to US growth over the past year, accounting for 40% of the total. But both domestic and global factors are changing the US growth dynamic… Ironically, the slowing in global growth could be the coup de grace for the US, just as it was the saving grace a year ago, and the evidence for such fading support is starting to appear in US exports.
The bottom line is that global growth is now beset by a cyclical downturn in the US, and a simultaneous pandemic of commodity inflation. There’s no easy way out of this cycle. U.S. companies are increasingly exposed to emerging markets, and a slowdown there would hurt their earnings. Similarly, emerging markets are dependent on strong demand from U.S. consumers, and malaise in the U.S. spells trouble for their export booms. Finally, sky-high inflation means that easy-money policies are becoming less tenable. We’re seeing is a broad rebalancing of the global economy as a US consumption binge eases and a glut in Asian savings morphs into steadily accelerating domestic consumption. These epochal shifts usually don’t come without at least some turmoil. So in the short term, be ready for more volatility.