About 18 months ago the idea of decoupling was all the rage. Decoupling was the concept that the economic fortunes of Asia and the West were no longer strongly intertwined.
Stock market analysts and economists postulated that the US and Western Europe would go into recession, but China and its domestic growth rate would keep Asia in positive territory. Those views turned out to be incorrect as the global financial crisis hit everyone, everywhere hard.
The issues of decoupling is back on the table as it seems that while we all went into this recession together, its possible that in the recovery Asia is decoupled from the west. This means that while the West experiences a sluggish economy, domestic demand in India and China will lead to a rapid recovery.
There are already signs that this is happening. U.S. exports to China are up. The BBC this morning was discussing the Indian Central bank plans for removing government stimulus in the face of a projected strong growth rate. At the same time, unemployment, weak consumer demand and potential national defaults in Europe loom large.
If Asian and Western economies are decoupling in the recovery then it has some significant impact on Western economic policy and corporate strategies. First, a decoupled world means that there is no one country or region at the front of the train pulling the world forward. In a coupled world, that used to be the U.S. whose domestic growth fueled demand for imports from Asia and therefore global growth.
Decoupling reduces the potential of Asia leading the way in a recovery as domestic Asian companies feed their own growth. This has been one of the under reported stories of China during the recession which has concentrated on building both domestic demand and supply. This is not to say that Asian growth will feel a drag from weaker growth in the west. It is to say that a decoupled global economy will work by new rules.
Under this scenario, growth in the East will not necessarily translate to growth in the West as many Western companies now produce and service global companies out of Asia. Sure Western companies will earn financial returns meeting local Asian demand with Asian supply, but that will do little to simulate western domestic demand or employment. Here are a few thoughts on what to look for in a decoupled recovery:
- Asian growth rates running 4% or more ahead of rates in the West.
- Return of commodity price pressures for industrial inputs in general and food in particular
- Rising Asian interest rates that drive higher interest rates in the West as Asian central banks seek to combat inflation and the West needs to retain Eastern investment to fund rising government debt
- Continued weakness in global shipping levels and container rates, as East-West product movements transition to East-East shipments
- Stronger inter-Asian M&A activity vs. Western M&A as companies view to buy market share and access to a growing market
- Targeted Asian acquisition of long-term growth play in the West, particularly companies that are part of the bedrock of global economic growth. Telecoms perhaps, engineering companies, logistics and transportation
Remember these are just theories.
Maybe this is just an idea driven by human nature. After all we can feel poor when we see our neighbor’s doing well. The opportunity to feel this way is more prevalent in a recovery than a recession where group think sees everything going in on direction – down.
We live in a global economy with complex and interconnected flows of goods that has produced growth that has lifted millions out of poverty as well as created economic crisis that impoverish us all. Economic decoupling in the recovery is just one of the scenarios that we need to consider and evaluate.
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