Global Economics - April 07

The global economy continues to be faring well in the face of a downshift in the US. Has the long-awaited decoupling — with the rest of the world untethering itself from the US — finally occurred?
It is premature to conclude that the world has faced a legitimate decoupling test. America’s deceleration has been concentrated in one of the least globalized pieces of
the US economy – homebuilding activity. It takes internal spillovers to drive external cross-border linkages.
America’s downshift will have global implications only if there are spillovers between housing and consumption demand.
Recent IMF research confirms the growing dependence of the rest of the world on the US, warning of a still synchronous global downturn if the US slowdown broadens and deepens. Canada, Mexico, China, and the rest of Asia ex Japan would be especially hard hit.

Market implications. I continue to believe that the American consumer will falter – taking the lead engine of the global growth train off the tracks, with the rest of the world quick to follow. That would be a major shock to financial markets, which are still discounting relatively sanguine prospects for global growth in 2007-08.

Risks. If the US labor market continues to display extraordinary staying power as it did in March, I would be the first to concede that the overly-indebted, saving-short
American consumer will squeak by – and so, too, will the rest of a still-coupled world.