Global reliance on US trade diminishes; emerging markets show more strength
(WASHINGTON) Wall Street economists are reviving a bet that the global economy will withstand the US slowdown.
Little comfort: Sixteen months after the US economy emerged from recession, its recovery is losing momentum, with falling factory orders and rising unemployment
Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc, Credit Suisse Holdings USA Inc and BofA Merrill Lynch Global Research are forecasting that this time will be different.
Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 per cent in 2011, even as expansion in the US falls to 1.8 per cent from 2.6 per cent.
Underpinning their analysis is the view that international reliance on US trade has diminished and is too small to spread the lingering effects of America's housing bust. Providing the US pain doesn't roil financial markets as it did in the credit crisis, Goldman Sachs expects a weakening dollar, higher bond yields outside the US and stronger emerging-market equities.
'So long as it doesn't turn to flu, the world can withstand a cold from the US,' Ethan Harris, head of developed-markets economic research in New York at BofA Merrill Lynch, said in an interview. He predicts the United States will expand 1.8 per cent next year, compared with 3.9 per cent globally.
That may provide comfort for some of the central bankers and finance ministers from 187 nations flocking to Washington for annual meetings of the International Monetary Fund (IMF) and World Bank on Oct 8-10.
IMF chief economist Olivier Blanchard last month predicted 'positive but low growth in advanced countries', while developing nations expand at a 'very high' rate. He will release revised forecasts tomorrow.
'The world has already become partially decoupled,' Nobel laureate Joseph Stiglitz, a professor at New York's Columbia University, said in a Sept 20 interview in Zurich. He will speak at an IMF event this week.
Sixteen months after the world's largest economy emerged from recession, the US recovery is losing momentum, with declining factory orders, a slowdown in pending home sales and rising unemployment, according to the median forecasts of economists in Bloomberg News surveys taken ahead of reports this week. Their predictions don't include another contraction, with growth estimated at 2.7 per cent this year.
Emerging markets are showing more strength. Manufacturing in China accelerated for a second consecutive month in September, and industrial production in India jumped 13.8 per cent in July from a year earlier, more than twice the June pace.
'It seems that recent economic data help to confirm the story of emerging-markets outperformance,' said David Lubin, chief economist for emerging markets at Citigroup Inc in London.
The gap in growth rates between the developing and advanced worlds is widening, he said. Emerging economies will account for about 60 per cent of global expansion this year and next, up from about 25 per cent a decade ago, according to his estimates.
The main reason for the divergence: 'Direct transmission from a US slowdown to other economies through exports is just not large enough to spread a US demand problem globally,' Goldman Sachs economists Dominic Wilson and Stacy Carlson wrote in a Sept 22 report entitled If the US sneezes. . .
Take the so-called BRIC countries of Brazil, Russia, India and China. While exports account for almost 20 per cent of their gross domestic product (GDP), sales to the US compose less than 5 per cent of GDP, according to their estimates.
That means even if US growth slowed 2 per cent, the drag on these four countries would be about 0.1 percentage point, the economists reckon.
Developed economies including the UK, Germany and Japan also have limited exposure, they said.
Economies outside the US have room to grow that the US doesn't, partly because of its outsized slump in house prices, Mr Wilson and Ms Carlson said. The drop of almost 35 per cent is more than twice as large as the worst declines in the rest of the Group of 10 industrial nations, they found.
The risk to the decoupling wager is a repeat of 2008, when the US property bubble burst and then morphed into a global credit and banking shock that ricocheted around the world. For now, Goldman Sachs's index of US financial conditions signals that bond and stock markets aren't stressed by the US outlook.
The break with the US will be reflected in a weaker dollar, with the Chinese yuan appreciating to 6.49 per dollar in a year from 6.685 on Oct 1, according to Goldman Sachs forecasts.
The bank is also betting that yields on US 10-year debt will be lower by June than equivalent yields for Germany, the UK, Canada, Australia and Norway. US notes will rise to 2.8 per cent from 2.52 per cent, Germany's will increase to 3 per cent from 2.3 per cent and Canada's will grow to 3.8 per cent from 2.76 per cent on Oct 1, Goldman Sachs projects.
Goldman Sachs isn't alone in making the case for decoupling. Mr Harris at BofA Merrill Lynch said he didn't buy the argument prior to the financial crisis. Now he believes global growth is strong enough to offer a 'handkerchief' to the US as it suffers a 'growth recession' of weak expansion and rising unemployment, he said.
Giving him confidence is his calculation that the US share of global GDP has shrunk to about 24 per cent from 31 per cent in 2000. He also notes that, unlike the US, many countries avoided asset bubbles, kept their banking systems sound and improved their trade and budget positions. -- Bloomberg