Reverse de-coupling may save the USA’s bacon

Fred Bergsten, director of the Peterson Institute for International Economics writes about the de-coupling hypothesis in today’s Financial Times and how it is now working to improve the US trade position and reduce the risk of recession.

De-coupling explains how the growth of the world economy has become less tied to the rate of expansion of the United States - still the world’s biggest single economy. This year, for the first time, Chinese consumers are adding more to global demand than are their counterparts in the USA. And the overall size of the emerging market countries has now appearently reached a critical mass - taken together they account for just about half of World GDP - this really is a seismic shift in the balance of economic power globally.

Here is a snapshot from the Bergsten article. In particular he notes that two forces are driving US exports higher - the lagged effect of a sizeable depreciation in the US dollar + the income effect on demand - as the world gets richer, they do want to buy more products from the States. If only world oil prices were not so high, we would be seeing a much large improvement in the size of the US current account deficit.

Trade has saved America from recession

“In spite of the international transmission of substantial financial as well as real economic shocks from the US, the traditional relationship where “the world catches cold when the US sneezes” no longer holds. ....US has been saved from recession by the rest of the world. ....The improved US trade performance of the past two years is due partly to the substantial, if lagged, restoration of the country’s price competitiveness as the dollar declined by a trade-weighted average of 25-30 per cent since early 2002 ....Exports have been climbing at an annual rate of about 8 per cent, at least six times as fast as imports. Unless domestic demand takes an unexpected further fall in the quarters ahead, reverse coupling of the global economy will thus have prevented the US recession that was so widely predicted and feared…..Presidential candidates and members of Congress who believe that the US is losing from globalisation should take note of this export-led growth and its creation of excellent new jobs, and recognise the folly of backing away from international trade at a time when it is providing critical gains for their country.”

The rest of the article is here