De-Coupling Back in Vogue as Emerging Economies Outshine the U.S.

While the U.S. economy is struggling to break its slump, growth remains strong in other places around the world - so strong, in fact, that analysts are breaking out a term that's spend much of the past two years on the shelf: De-coupling.

U.S. gross domestic product (GDP) will meandered along with a meager 1.7% expansion in the second quarter and is expected to grow by less than 2% for the full year.

Meanwhile, Brazil's GDP is on pace to expand by 7.5%, India's economy is projected to grow by 8.5% and China's economy is expected to grow by 9.5% this year.

Emerging market economies are moving ahead at such a brisk rate that their combined GDP will be bigger than developed countries by 2015, according to the World Bank.

Now, the biggest Wall Street firms - including Goldman Sachs Group Inc. (NYSE: GS) Credit Suisse Group AG (NYSE ADR: CS) and Bank of America (NYSE: BAC) - are betting that the global economy has de-coupled from the United States, and will shake off any slowdown in the world's largest economy.

Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6% in 2011, even as U.S. growth slows to 1.8% from 2.6%. The investment bank expects a weakening dollar, higher bond yields outside the United States, and stronger emerging-market equities.

"So long as it doesn't turn to flu, the world can withstand a cold from the U.S.," Ethan Harris, head of developed-markets economic research in New York at BofA Merrill Lynch, told Bloomberg News in a telephone interview. He predicts the U.S. will expand 1.8% next year, compared with 3.9% globally.

Decoupling, the idea that European and Asian economies have broadened and deepened to the point that they no longer depend on the world's biggest economy for growth, grew fashionable in economists' circles in the earlier part of this decade.

But after the Great Recession struck in 2008, global economies suffered along with the United States. And, contrary to what the de-couplers expected, stock market drops were greater outside the United States, with the worst declines coming in emerging markets and developed economies like Germany and Japan.

Some analysts jumped on the meltdown as evidence that de-coupling was a myth and that U.S. growth is imperative for the global economy.

"Sadly, the 'decoupling' thesis has little support in theory or in practice," Desmond Lachman wrote in a 2008 article for the American Enterprise Institute. "Its proponents overlook the fact that during the past five years the U.S. economy grew faster than all the other G-7 economies. During that time, America's economy remained the principal generator of global aggregate demand, accounting for around one-fifth of global imports and 25% of global production."

But now, emerging markets are growing at a much faster pace than developed economies, leading Wall Street firms to revive the de-coupling theory, maintaining that global markets are strong enough to chart their own course.

Emerging economies will account for about 60% of global expansion this year and next, up from about 25% a decade ago, David Lubin, chief economist for emerging markets at Citigroup Inc. (NYSE: C) told Bloomberg.

"Direct transmission from a U.S. slowdown to other economies through exports is just not large enough to spread a U.S. demand problem globally," Goldman Sachs economists Dominic Wilson and Stacy Carlson noted in a Sept. 22 report.

The Goldman analysts point to the so-called BRIC countries of Brazil, Russia, India and China for proof.

While exports account for almost 20% of these countries' GDP, sales to the United States compose less than 5% of their total economies. Even if U.S. growth slowed by 2%, the drag on these four countries would be about 0.1 percentage point, the economists figure. Developed economies including the United Kingdom, Germany and Japan have similarly limited exposure, they said.

Some analysts contend that economies in developing nations aren't merely decoupling from the United States, they're driving the world economy, and their growth could actually help rescue advanced nations.

The BRIC countries are among those least vulnerable to a U.S. slowdown because they have more room than industrial countries to ease policies, according to a Sept. 14 study based on trade ties by HSBC Holdings PLC (NYSE ADR: HBC) economists.

"Emerging economies kept their powder relatively dry, and are, for the most part, in a position where they could act counter-cyclically if needed," the HSBC group said.

"The rest of the world appears to be doing much better than we are," says Money Morning Contributing Editor Martin Hutchinson, who correctly predicted the record price surge in gold. "In the long run, that's good news for the United States. Rapid world growth will eventually rekindle the economic fires here, producing a growth that is more balanced than the bubbles of 1995-2008."

"On balance, U.S. investors should be optimistic for 2011 and beyond," he added. "Rapid global growth should rectify the U.S. balance-of-payments problem, so that even modest fiscal discipline will produce a quickening of U.S. growth rates, and a full economic recovery."

News & Related Story Links:

• Bloomberg: World Economy Decoupling From U.S. Returns as View
• Wikipedia: Decoupling
• Market Oracle: Economic Decoupling Fails as World Follows US into Recession
• Money Morning: The Headline You Never Expected: Foreign Growth Could Bail Out the U.S. Economy
• Money Morning: The Five Ways to Profit From the Pending Gold Bubble