Decoupling is very much in vogue. The debate is essentially whether India and other emerging economies would suffer synchronised recession along with the US. Suppose these economies are coupled together like the coaches of a train, with the US acting as the locomotive pulling the rest along. If the US slows down, so would all the rest. If, on the other hand, the economies are decoupled, a US slowdown or recession would be less of a worry.
For many observers, the way the Sensex tumbles when bad news comes out of the US has clinched the argument against decoupling. Such a conclusion would, however, be facile. To begin with, one must appreciate the short-term divergence between financial markets and the real economy. When the US Fed cuts interest rates, to stimulate a faltering economy, the markets actually go up.
Shouldn’t the Fed’s confirmation of a slowdown on the horizon move the stock market in the opposite direction? In actual fact, the immediate response of the market is driven by the short-term rise in liquidity arising from the Fed’s rate cuts. Movements in financial markets, let us be clear, have no one-to-one correspondence with developments in the real economy.
The latest issue of The Economist examines the decoupling debate in some detail. It finds that developing countries are far less dependent today than they were in the past on the US as an export destination. Exports to the US account for only 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. And these economies together contributed 40% of global GDP growth last year. The US contribution to global growth was just 16%.
The point to note is that growth and prosperity in the emerging economies also drive trade amongst them. China is India’s fastest growing trade partner. Emerging markets collectively sent more than half their total exports to other emerging markets.
In fact, China by itself absorbed more than 15% of all emerging market exports, a little more than what the US did. If China were to go into recession, that would be a real problem. While the Chinese authorities are indeed trying to slow down their economy from last year’s 11.2%, that slower rate would still be a fabulous one.
If the global economy were indeed to be hurt by a US slowdown or recession, the least reprieve we would have got is lower commodity prices. But oil continues to soar. Steel makers are happily hiking prices, as are virtually all other commodity producers.
For many observers, the way the Sensex tumbles when bad news comes out of the US has clinched the argument against decoupling. Such a conclusion would, however, be facile. To begin with, one must appreciate the short-term divergence between financial markets and the real economy. When the US Fed cuts interest rates, to stimulate a faltering economy, the markets actually go up.
Shouldn’t the Fed’s confirmation of a slowdown on the horizon move the stock market in the opposite direction? In actual fact, the immediate response of the market is driven by the short-term rise in liquidity arising from the Fed’s rate cuts. Movements in financial markets, let us be clear, have no one-to-one correspondence with developments in the real economy.
The latest issue of The Economist examines the decoupling debate in some detail. It finds that developing countries are far less dependent today than they were in the past on the US as an export destination. Exports to the US account for only 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. And these economies together contributed 40% of global GDP growth last year. The US contribution to global growth was just 16%.
The point to note is that growth and prosperity in the emerging economies also drive trade amongst them. China is India’s fastest growing trade partner. Emerging markets collectively sent more than half their total exports to other emerging markets.
In fact, China by itself absorbed more than 15% of all emerging market exports, a little more than what the US did. If China were to go into recession, that would be a real problem. While the Chinese authorities are indeed trying to slow down their economy from last year’s 11.2%, that slower rate would still be a fabulous one.
If the global economy were indeed to be hurt by a US slowdown or recession, the least reprieve we would have got is lower commodity prices. But oil continues to soar. Steel makers are happily hiking prices, as are virtually all other commodity producers.
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