Reader Poll - Decoupling and Will America drive the rest of world into a Recession?

Decoupling. Not a rude word, but one that is being used to discuss the financial and economic separation between the United States and the rest of the world. In particular, economists argue about whether or not the world will follow America into recession, based on the strength of the interdependence or lack thereof between the new growth economies like China/India and America.

Click here to vote on the US recession reader poll (left pane) at Finance ViewPoint.

Decoupling does not mean that an American recession will have no impact on countries around the world. Just look at the current credit crisis and US recession which has been reflected in falling share markets all over the world. The point is that their GDP-growth rates will slow by much less than in previous American downturns. Most developing economies like China and India, enjoyed strong growth during the fourth quarter of last year, and some speeded up, even as America's economy ground to a virtual halt and its non-oil imports fell.

There is also growing evidence supported by hard data that decoupling is no myth as published in a recent Economist article. Indeed, it may yet save the world economy.

- China's growth in exports to America slowed to only 5% (in dollar terms) in the year to January, but exports to Brazil, India and Russia were up by more than 60%, and those to oil exporters by 45%. Half of China's exports now go to other emerging economies - so they are far less dependent on the US for its exports.

- Emerging markets domestic consumption and investment quickened during 2007 - showing the rise in consumer wealth in these countries. Their consumer spending rose almost three times as fast as in the developed world. Investment seems to be holding up even better: according to HSBC real capital spending rose by a staggering 17% in emerging economies last year, compared with only 1.2% in rich economies. It also looks like capital spending growth will continue for many years as these countries modernize and spend billions on infrastructure and related services.

- The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China's GDP, 4% of India's, 3% of Brazil's and 1% of Russia's. Over 95% of China's growth of 11.2% in the year to the fourth quarter came from domestic demand. China's growth is widely expected to slow this year but to a still boisterous 9-10%. The data here is the key support for the decoupling argument.

For the first time ever, developing countries would be able to make full use of monetary and fiscal policy to cushion their economies from a US recession. In the past, when they were net foreign borrowers, capital inflows tended to dry up during global downturns as foreign investors shunned risky assets. This forced governments to raise interest rates and tighten fiscal policy. Economies with large external deficits are still vulnerable, but most emerging economies now have a current-account surplus and large foreign reserves; many have a budget surplus or are close to balance, leaving ample room for a fiscal stimulus if necessary.

Looking at Australia in particular, it seems we are now far less dependent/linked to the US economy than we used to be. Normally when the US economy entered a recession, Australia was not too far behind. Yet the Australian (and New Zealand) economy is booming and interest rates are rising to control inflationary growth (unlike the US where interest rates are falling to stave off a recession). This is probably due to the fact that China and India are becoming much more significant trading/export partners for Australia, thanks in large part to the demand for our resources and related services. A sharp slowdown in China would hurt Australian much more than an American recession will.

Perhaps the best support for decoupling comes from America itself. Fourth-quarter profits of big companies, such as Coca-Cola, IBM and DuPont, were better than expected as strong sales growth in overseas markets offset a sharp slowdown at home. Bits of American business are rising above their own economy. With luck, the world economy can rise above America's.

What do you think - Which parts, if any, of the world will follow America into a recession? Click here to vote on the reader poll (left pane) at Finance ViewPoint - You can select multiple answers. I will publish the results in a comment on this post.