The Decoupling of The word continues

Escrito el 7 abril 2013 por Mikel Aguirre en Economía Global

We may see a global growth in 2013 more stable than previous year but the fact is that the GDP growth is going to be driven by emerging countries and Asia in particular.

Large emerging markets will benefit from lagged effect of 2012 accommodative economic policies (especially in Asia).  On the other side the Euro area will remain a drag for global growth, as an effect of the lower growth in France and Italy mainly and despite a slight upward revision of Germany´s growth expectation.  The US will achieve a growth under 2% due to private investment and consumption recovery offsetting fiscal consolidation effects.  Finally Japan´s growth is expected to be comparatively moderate during the following months, waiting to see the effect of the measures implemented by the Central Bank to double money in circulation with a 2% inflation eyed.  As Japan has faced since the nineties many of the economic weakness that now Europe suffers, it will be interesting to see the outcome of this monetary policies to boos private consumptionThe world

The other side of the coin in the growth based in the emerging countries will be the increasing of political instability due to the significant pressures for change (North Africa, Middle Eastern region, Russia, Venezuela…), the increase of protectionism and the banking credit risk due to the forming of real bubbles in the house hold and business credit markets

So the decoupling continues and the risks rises wordlwide


Alejandro Alvariño 8 abril 2013 - 13:26

There´s no doubt that emerging countries from latin america and Asia are leading the world economic growth at this point but there are some quite good news for the developing countries as in 2013 USA is growing around 2% and in 2014 GPD will grow close to 3%. In the mean time, while Europe is facing recession and troubles with Greece, Cyprus or Portugal, The european commission said the eurozone would exit recession in the fourth quarter of 2013 before growing 1.4 per cent in 2014. If seems that developing countries are seeing the light at the end of the tunel.

Moacir Baracho 8 abril 2013 - 14:00

I think the BoJ policies will certainly have a good impact on Japan’s exports. It should take the Yen further down, which will help the country’s export industry, and also impact positively on the GDP. It is difficult to say though whether it will increase the lending/spending in the country, as recent examples in the UK and US are not very assuring. In regards to the argument on credit bubbles in emerging markets, I fully agree with the increase on risks. I think real growth in income has not accompanied levels of growth in spending. In the case of Brazil, a lot of credit has been given out with no assessment and guarantees. A new huge lower class is spending on credit, and they have little or no financial education whatsoever. Consumer default levels have been increasing.

Bernardo Lyon 9 abril 2013 - 11:58

It is going to be really interesting to see what will happen with the new measures taken by the BoJ. Printing money to raise inflation looks like a really good idea to move away from deflation.
The greatest risk of doing it is that, together with inflation comes higher interest rates that could foster people to even consume less. Therefore the measure could bring catastrophic consequences.

Maria Alejandra Herrera Vallejo 9 abril 2013 - 13:35

I read an interesting article related to BoJ announcement made last week about increasing money in circulation. Similar to Moacir, many people are optimistic that the Quantitative Easing may have a positive impact on the Japanese economy. However, the author of this article is a bit more skeptical and makes some interesting arguments worth sharing. The author claims Japan has already used Quantitative Easing measures in the past, between 2001 and 2006 in the attempt to generate inflation, but even though money supply did increase, inflation was not created. As Moacir pointed out, printing money and increasing money in circulation does not necessarily increase consumer spending and investment. Many investors are currently just looking for yield and are willing to go to other markets to find higher yields. I agree with the author who claims it is important to provide and stimulate good investment opportunities domestically to ensure the Quantitative Easing measures will yield the results the BoJ expects. I personally believe in addition to this, the government must take other measures to increase consumer confidence which is key to stimulate consumer spending and investment.


Young Chul Lee 9 abril 2013 - 18:08

The recent Japanese monetary move will certainly boost its export as the local stock market rally vindicates it somehow, with weakening Yen, which would build up inflationary pressure by making imports more expensive. While the monetary action seems to achieve its intended inflation objective in short term, however, it is still doubtful whether this will boost consumption and corporate investment in the country where consumers and corporates all together are still unwilling to borrow even with the historical low level of interest rates.

On the US side, the positive growth prospect for the next couple of years is definitely an encouraging but the mixed signs in employment data are still worrisome. The current level of unemployment, 7.7%, should show some slackening sign in order to confirm the true recovery. China, which has been a long-time global growth powerhouse, on the other hand, shows a slower pace as well while Eurozone has yet to recover from the sovereign debt crisis.

In sum, the global economy seems to continue to suffer from a global recession. Despite encouraging signs in some parts of the world, it may be too early to call it a genuine decoupling, which I hope to see.

Young Chul Lee 9 abril 2013 - 18:47

In a situation where the government is under huge fiscal deficit and interest rates are already too low to decrease, the only way to achieve a policy objective is more money supply in the market, better known as quantitative easing or QE, based on the belief that easily available money would boost lending, which will eventually encourage consumption and investment needed for recovery. This type of monetary easing has worked at least in the financial market, particularly in the US and Eurozone, equity and bond markets of which heavily rely on this non-conventional measures.
As Maria and Moacir probably agree, QE may not be workable if a policy objective is aiming at something beyond financial market rallies, which is robust consumption in real economy. History proves it. Japanese economy in the 2000s was in a liquidity trap where interest rates were too low for any rates change to make any meaningful impact on real economy with fiscal policy tool stalled in huge deficit as well. So they chose to inject more money in the banks’ account hoping for more lending while banks and corporates were still preoccupied with cleaning up the mess from real estate bubble bust, what some people call balance sheet deficit.

Ana María Quintero 9 abril 2013 - 19:55

There is no doubt that the world growth is being pulled by the emerging economies. However I will like to focus my comment on the overheating signs of some of the emerging economies that might be happening and which need special attention. The overheating of an economy occurs when the productive capacity is unable to keep the pace of the growing demand. Some emerging countries have already started to show signs of overheating and it is here when these countries must take smart decisions in order to sustain the growth that they have had without having huge inflation rates that might put in danger the monetary stability of the country. According to the Economist the countries that show the larger risk of being overheating are Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam.

Eduardo Aquiles Farias Hansen 10 abril 2013 - 11:50

As decoupling in the world continues it has a larger effect on the shift of migration of skilled workers around the globe. In the past decades we where us to observe skilled and under skilled workers from emerging economies migrate for better job opportunities to developed countries such as the EU, the USA, and Australia for example. However since the major economic crises has worsened in developed economies, and GDP has rapidly accelerated in emerging economies such as India, China, Brazil, and Colombia for example it is the Americans, Europeans, and Australians the ones migrating to the emerging booming economies. This is a phenomenon that very would have ever though possible a decade ago, including this new expats in growing emerging economies themselves. Reality is that many industries are already mature in developed economies, and due to the crisis consumption of goods and services is shrinking, as it is there populations. On the contrary on booming emerging economies there are a lot of opportunities, they have large growing new middle class population that is thirsty for goods and services they never even dream about having access too. Both multinationals and companies originally these developing economies need skilled workers to assist in this fast growth of consumption in these countries.

Please find more information on this interesting topic on the article below from The Times of India newspaper.

Susila Cherla 11 abril 2013 - 01:40

The crisis of 2008-2009 of the global economy is yet to shake off. Overall growth has dropped to approx 3% in 2012 which indicates that about a half a percentage point has been shaved off the long-term trend since the crisis emerged. This slowing trend will likely continue. Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013.

The growth rate of the world economy will hold steady at 2.6% in 2013. Its predicted that the stage will be set for a modest acceleration of growth in the latter part of the year and during 2014.Uncertainty across the regions from the post-election ‘fiscal debate’ question in the U.S. to the Chinese leadership transition and reforms in the Euro Area will continue to have global impacts in sluggish trade and tepid foreign direct investment.

I want to discuss about the impact on commodity prices and on inflation because of the above.
Commodity Prices : Commodity prices didn’t get impacted despite the good deal of volatility in 2012. Similar is predicted for 2013 as well. The inventories at some places may shoot up which would have a slight downward pressure. However tensions in Middle East and North Africa could impact the prices of oil in either direction. It would go up if the instability increases and would go down if there is de-escalation.This shall have a considerable impact on the economy.

Impact on inflation : The rate of inflation was down between 2011 and 2012.This state of affairs is likely to continue through 2013, despite worries about the inflationary potential of the massive amounts of liquidity around the global economy. In fact, in the developed world and some emerging regions (notably Asia, the Middle East and Africa), inflation will continue to drift down over the coming year

For mature economies, a significant slowdown is predicted in the next year. Possibility of raise in inflation, increase in unemployment, imbalance of demand,supply may add to the predicted slowdown. US dollar is predicted to be stronger against the Euro

The tighetening of Fiscal policies in the US will stabilize the US debt ration. France has the biggest deficit to GDP ratio and will be pressurized to constrict the fiscal policy.

India is likely to grow by 5.9% and china by 8.2% in 2013

“The cliffs may be gone but the economy has to pass thru high mountains”

Miguel Aguirre 11 abril 2013 - 08:40

In the case of Europe the magnitude of the negative impact on activity depends on ECB’s and European governments’ reactions
A scenario of uncertainties would have a negative impact on activity through various channels:
Prolonged political uncertainties would deter business confidence and so private investment.
This would push sovereign interest rates higher and so have a negative effect on companies’ and households’ funding conditions:
Higher sovereign bond yields mean high corporate bond yields and so less favourable financing conditions for large companies
Higher sovereign bond yields have a negative effect on local banks funding conditions. Therefore banks are inclined to translate this into higher lending interest rates for households and local companies. These tighter credit conditions are negative for both household spending and private investment.

Jason Sigler 11 abril 2013 - 17:35

The thing that I find most interesting about the Japanese situation is what some people alluded to earlier, the fact Japan has had liquidity problems for essentially two decades now. People in the West, especially in Anglo-Saxon countries, are reluctant to compare the two situations: however I see quite a few similarities between what is occurring now in the US and the UK. For example, someone mentioned earlier about how the United States was looking at around 2% growth and how this ought to be seen as a positive. Isn’t that eerily reminiscent of how Japan, after decades of MITI-led 5-10% growth, revels at the prospect of getting over say 2%?

Of course the situations aren’t completely apt. The Japanese banking crisis in the early 90s, it could be argued, was far more severe than what the US and the UK are experiencing now. Yes, it was a housing bubble… yes, there are liquidity trap issues… and yes, they broke the infamous Taylor rule… but I would indeed agree with others that there are important differences between the UK and the US today and Japan in the early 90s. Nonetheless, I think the similarities ought to tell us something about what the US, the UK, and to a lesser extent Western Europe is looking at in the future.

For example, Japan is in a convoluted catch 22. It can’t raise rates until the economy improves and the economy can’t improve until liquidity increases. I believe Japan’s debt to GDP ratio is the 2nd highest in the world (only after Zimbabwe if my memory serves me right), so fiscal measures are obviously risky. You can’t go lower than 0, so as mentioned previously, the Taylor Rule no longer works. What can be done? Here is where I see the US and the UK having similar problems. I believe it was Rogoff who has the 90% Debt to GDP rule… a rule which Japan has broken, and the US and the UK are well on the way to breaking as well.

I am curious if anyone agrees or disagrees with my assessment. Obviously it is a bit too early to declare that the US and the UK will experience “lost decades” as well, but the combination of the liquidity trap, the zero bound, and increasing fiscal debts could indicate that its a possibility.

Jason Sigler 11 abril 2013 - 17:52

As for the decoupling aspects themselves, I do believe there will be a further double dip (triple dip?) recession that will have profound trade and geopolitical effects down the road. Both Keynesians and Monetarists have had to review their policies in this globalized world, given how stimuli and expansionary monetary policies haven’t done that well. Therefore, what is stopping the developed countries from falling further? Unless there is a substantial change in the competitiveness or the pricing within these countries, then nothing is going to change… which will lead to further problems.

The most obvious problem is naturally the trade imbalance around the world, and there will inherently be ramifications in regards to that. The natural order states that when a country’s goods become nonviable (at least in a floating exchange rate economy), the exchange rates will adjust accordingly and it’ll even out the problems. Naturally, on many fronts, that is not happening. For Spain, Portugal and Italy, obviously they have the Euro problem that will likely need to be resolved. Then there is the ever-present, and some would argue overrated, China problem. And even for those floating exchange rate currency countries, there is always a Korea or Israel, that practices the “dirty float” technique to success. Thus, in my opinion, the decoupling will cease only when some of these issues are resolved.

Outside of that problem though, I do wonder if there is another solution to the decoupling issue. Often when people talk about this, they are stating how the developed world must catch up or impose some restrictions to help themselves. What if though that the solution to the decoupling simply will be a convergence of sorts? Perhaps nations like the US and Japan are simply doomed to a new rate of growth, say .5%, and non-rentier states will stop growing only when they catch up. Not the best scenario, of course, but surely a possible “solution” do the decoupling.

Tshepiso Mohale 11 abril 2013 - 20:05

The urbanization of emerging markets supported by long-term trends such as the removal of trade barriers, and the increase of market-oriented economic policies has driven growth in emerging economies. By 2025, it is estimated that annual consumption in emerging markets will rise to $30 trillion, up from $12 trillion in 2010, and account for nearly 50% of the world’s total. As a result, emerging-market consumers will become the dominant force in the global economy. In 15 years’ time, almost 60% of the approximately one billion households with earnings bigger than $20,000 per year will live in the developing world. In many product categories, such as electronics, emerging-market consumers will account for the overwhelming majority of global demand. China already has overtaken the United States as the world’s largest market for auto sales. For global growth, emerging markets are likely to outperform developed economies significantly for decades.

Guilherme Costa 12 abril 2013 - 15:31

I would like to explore and maybe challenge the concept of decoupling effect. By definition, according the decoupling theory, emerging countries GDP growth are become less dependent of the ups-and-downs of the developed economies. I am a little bit suspicious about this theory and about the future predictions claimed by some economists. We can not forget that, in general, the recent GDP growth in emerging countries were driven by export transactions and the biggest importers in the world are still developed countries – the exception is China, but only because China imports raw material to manufacture products which will be exported afterwards. Therefore, in my opinion, the slow down in the economic activities of developed countries will have in the medium term a high impact on developing countries.

The other parts of the GDP equation needs to be solved to sustain GDP growth in developing countries. Internal consumption in developing countries, like Brazil for example, was boosted by social programs and credit incentives. In the medium term this is not sustainable. If emerging countries does not solve the social problems such as inequality for example, it will be impossible to create a strong internal market to drive GDP growth.And, again, in my opinion, this problems are far away to be solved.

Alejandro Alvariño 12 abril 2013 - 18:51

I totally agree with Guillerme´s view, developing countries needs to develop a strong middle economic class that supports their GDP in the long run. This middle class fosters consumption and pays taxes that provides public expenses. Right now, they are able to grow fast but in a few years they will have to face the money inequality distribution that the have.

Funmi Odushola 12 abril 2013 - 20:30

JASON, I agree with you in regards to the repeat of history and the similarities between what happened in Japan about 2 decades ago in comparison to what we see happening in parts of Europe and the US. It begs me to question if DECOUPLING is something that actually happens or power (of trade for instance) is simply transferred.
Can we truly decouple the world’s economy? GUILHERME questions the decoupling theory, I am more suspicious of the term itself and if it is applicable to our various countries.

It will always be the case in international trade, in my opinion, that some countries will export more than others while other countries are bound to be bigger importers. At this moment in history, the United States plays the role of the bigger importer and we have seen in class, The Netherlands and Germany as the exporters. This may not always be the case and I believe that this is where decoupling happens. As such, in the future, we can expect that there will be less of a dependence for exporting countries to rely on the United States for economic growth.

However, I feel that this trading power can simply shift to any country, we see China today for instance. This is evidence that “true or pure” decoupling does not actually happen and that power is only diminished and transferred.

In a global world where we all have to trade with our limited markets, some countries will have stronger positions than others who remain dependent. In the end, countries simply decouple and re-couple with the “happening” economy or stronger partner.

Vipul Bhushan 13 abril 2013 - 19:11

I would like to pose a question about China. I think it is interesting to see that China is growing so fast (mainly through exports) that the the Chinese authorities keep tightening credit in order for the economy not to overheat, it is believed that these measures are in the best interest for the long-term well being of the Chinese market. It makes one wonder how such measures affect Chinese companies outside of China, more precisely small and medium cap firms–especially in the short term?

Gerardo Berea 13 abril 2013 - 21:21

Regarding the middle class comments from Guilherme and Alejandro above, I would say that understanding how the middle class is evolving worldwide is key to see how far the Decoupling of the world will go or how long will it last. The decoupling hypothesis states that developing economies are reaching a point where they are no longer dependent of the developed economies to grow in GDP terms. This would imply that international trade and more specifically exports to developed economies is no longer the main economic motor for developing countries. What, if not exports, would be the main economic motor for them? The answer is the consumption of a growing and already very large population, but more importantly, the consumption of the emerging middle class; and also expenditure for services for this population. The world population is projected to grow by 1 billion people by the year 2030, but the amount of people within the middle class has been predicted to grow by almost 3 billion by that year. Today we only have 2 billion people in the middle class. We will have more than double in 17 years!!!! If the middle class represents the major demand side, Are we able to produce and supply every year more than double the goods we are producing and supplying now a days? Is the world ready to sustain that impact? I doubt it, and this might limit the world to completely decouple.
Data taken from OECD

Julio Alejandro Saca 15 abril 2013 - 15:52

Regarding the instability of the emerging economies and the role that the Venezuelan government has on many of this mainly because of is subsides and political influences will likely be heading in the same direction now that Maduro has been elected. I see is subsides as great threat to the affected countries because, although there is money injected into their economies, the local governments use that money to create social programs with little social benefits. This programs most of the time consist on giving basic needs such as food or clothe to people but are almost never focused in education or other initiatives that could contribute to the sustainability and future growth of the lower class. People get used to getting thing for free and therefore the productivity of the country suffers. In my country , El Salvador, Alba has diversified into more than 8 different companies often providing prices which are suggested under the cost of production. If this dumping is indeed true, national companies will be affected and the independence of our economy could be at stake.

Sandra Keller 19 abril 2013 - 20:47

Back in 2009, with the collapse of Lehman Brothers, the stock market crash and all that ensued put a staggering strain on advanced economies, gravely impacted emerging markets – some said that as a result, decoupling was dead. Now more than ever, money flow, commerce between borders is fast paired with almost instant access to news streams due to the web has changed the way these economies affect each other. Increasingly, markets are becoming more synchronized which suggests it to being highly unlikely that there will be sustained periods of decoupling in financial markets any time soon. Though stocks are prone to climbing and falling, ‘the real economy’ is understood by looking at a country’s GDP, consumption, and level of investment in that country. In recent years we’ve seen huge GPD growth in both China and India; however we know that emerging economies have the potential for higher growth rates than advanced economies. The real question when looking at emerging markets is how heavily reliant they are on advanced economies; China, for example, has proved itself to be self-sustaining but China in many ways, is an extreme case due to its unique environment for labor, production and having had two currency rates giving it an economic advantage. The larger point is that emerging markets have proven themselves to be able to withstand the hits of what has felt like a perpetual global recession. I agree with an earlier comment that a lot will depend on barriers to trade and what market-oriented economic policies will be put in place to help determine future global growth, with particular focus on Asian countries and what manifests there in these described areas.

Juan Esteban Cabal 25 abril 2013 - 02:34

Focusing on the decoupling theory as many above have already mentioned its definition, I agree that actual behavior in the world economy shows signs of decoupling as for GDP growth right now driven by emerging markets. Emerging markets have built stronger domestic demand and strengthen domestic policy frameworks to lower the impact of net exports and external vulnerabilities. This can lead to a scenario where emerging markets could recover faster than leading economies from a global crisis, but on the contrary, no matter how they no longer relay on leading economies, if a financial crisis approaches the past has shown us that they are not immune and it could result into a global recession. Equity markets are also one of the examples that can show the downside of the decoupling theory: while US and Europe show signs of recession and emerging markets performance reflects GDP growth, stock markets do not necessarily behave the same way. Sell-offs that reflect the slowdown of an advanced economy occur in a globalized manner, even though emerging markets show GDP growth.

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