Friday, 23 November 2007

The Myth Of Decoupling

An oft repeated mantra of the argument for a continuation of the bullmarket goes something like this: Despite a slowdown in US growth the world economy will pick up the slack as they are less dependent on the US economy. It all sounds nice but it is based on sound reasoning?

Governor of the Bank of England, Mervyn King, issued a grim warning last week about the state of the UK economy and by implication a large part of Europe:

He (Mervyn King) said the Bank's "central outlook for the UK economy is, in the near term, one of slowing growth and rising inflation. But further ahead that outlook is for a return of growth to its average rate and inflation to target...."

"With house price inflation easing and commercial property prices falling, residential and commercial property investment are likely to moderate, possibly quite sharply. And with tighter credit conditions in the future, the personal saving rate is likely to rise, bearing down on consumer spending...."

How about Asia and the other 'BRIC' economies? Even the Chinese government is warning that a US slowdown could have significant knock-on effects on Chinese growth.

US slowdown threatens Chinese export growth

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has “decoupled” from the US. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said....

Exports to the US have slowed significantly since the start of the year, dropping from a 20.4 per cent year-on-year rise in the first quarter to a 15.6 per cent increase in the second. Growth fell to 12.4 per cent in the third quarter following the eruption of subprime loan problems.

You don't need to read between the lines here. The Chinese government don't believe the decoupling thesis and in a still largely centralized economy they should have the best idea. The chart below comes from Morgan Stanley Asia's Steve Roach which shows that Asian economies are more dependent than ever on export led growth.

Also picked up this story from the Wall Street Journal, although you need to subscribe to read the full article. However the following blog has kindly reproduced it, from

China Freezes Lending to Curb Investing Frenzy

Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy.

In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.

A China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don't exceed the total outstanding on Oct. 31. The official described the request as "guidance aimed at supporting the macro-control measures being implemented."

Over the past few years, Chinese authorities have repeatedly sought to rein in investment in sectors such as property development, where they deemed it was becoming excessive. But even in China a blanket edict to halt lending growth is unusual.

Click on the link above for the full article. You have to give the Chinese government some credit for trying to reign in excesses however the horse has bolted. It is inevitable given the rapid pace of growth in China and the relative immaturity of it's financial system that there will be some train wrecks in the wake of a global economic slowdown.

No doubt at some point a gradual decoupling from the US economy will come to pass but we are still a couple of decades away from that reality IMHO. The health of the US economy is still of vital importance to the rest of the world and thus the theory that Europe and China will carry the global economy is little more than wishful thinking.