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We’ve pointed out how U.S. markets have not been overly concerned about Europe lately.A note out from Deutsche Bank’s Joseph LaVorgna argues that the U.S. economy shouldn’t be either.
His reasoning? The increasing pace of household consumption and business investment rather than exports will drive growth in the coming quarters. This means downside risks to exports heading to Europe just aren’t that big a deal.
In his words:
We think a euro-zone recession does not have significant implications for the US outlook as long as it is not accompanied by significant financial contagion and is not of sufficient magnitude to cause a global recession.
Indeed, exports to Europe account for just 2% of GDP, versus total exports which correspond with 13% of GDP. Instead, export demand from other markets will determine the success of exports in the coming quarters:
The more important consideration for the export outlook will be economic developments among other major trading partners, such as Canada, Mexico, South/Central America and Asia. Some demand in these markets may be tempered by second order effects due to weak European demand, for example exported industrial equipment used to produce goods that are then shipped to Europe. However, we believe there is sufficient demand outside of the euro-zone to maintain positive export gains, albeit at a more measured pace…
Our medium term forecast for export growth incorporates an ongoing deceleration from near 9% (year-on-year) at the start of the current year to 3.9% by yearend 2012. As such, we remain constructive on the US outlook, which should be increasingly buoyed by improving domestic fundamentals.