Sunday, January 27, 2008

More On Decoupling

The Economist has an interesting article pointing out that emerging Asia are likely to suffer less from the U.S. recession than many people think.

As was explained in a previous article in The Economist, the dependence of exports to the U.S. is often exaggerated (admittedly, I have done so in the past too) by comparing gross exports to GDP. But since exports are measured as gross sales while GDP is measured in value added terms, such a comparison is really a case of comparing apples to pears. If you made a pure apple to apple comparison and excluded the large imported inputs for the exports, then China's exports would be only about 10% of GDP, and only a few per cent of GDP if you only look at exports to America.

It is thus not really that shocking that China's real GDP growth managed to stay at a full 11.2% in the fourth quarter, despite the fact that exports to America rose only 1% in yuan terms and so actually declined in real terms. As the article puts it:

"Those who argue that Asia cannot decouple from America are ignoring the fact that they already have. Take Malaysia: its exports to America plunged, yet its GDP growth quickened from 5.7% at the end of 2006 to 6.7% in the third quarter of last year."

Considering the fact that Euro area is far less export-oriented than Asia, it seems even less likely that it will be dragged down in any significant way by the U.S. recession. The main risks to the Euro area expansion instead consist in the financial anxiety created by exaggerated fears of recoupling (which would be a case of self-fulfilling prophecy), and also of the negative effects of possible housing busts in Spain and Ireland.


Anonymous JMR said...

There's another interesting article at Can China really ‘de-couple’ from a US recession? that argues against the decoupling theory. It quoted from a deeply buried old Austrian School book by Wilhelm Röpk.

Also, Nouriel Roubini will have an argument against those who says that decoupling had already occurred. According to him, the reason why decoupling is not evident yet is because it is only until recently that US consumer spending has been affected. So, it is premature to conclude that decoupling had already occurred given that the full-blown plunge in US consumer spending is still yet to develop fully.

1:30 AM  

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