Dragging Down the World

That hot new theory that the global economy doesn’t depend on the United States anymore? It’s completely wrong.

China's shares drop to 20-month low as no new measures introduced. Click image to expand.
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“Decoupling,” a promising economic idea imported from abroad, lasted a little longer than Coupling, an exciting entertainment imported from abroad. Coupling is a British sitcom that NBC adapted with much fanfare and cancelled after four episodes. “Decoupling” is the notion that the rest of the global economy could power ahead even as its biggest single motor, the United States, stalled. Decoupling was trumpeted by many of the international grandees at the World Economic Forum in Davos, Switzerland, last January and gained currency in certain circles (including the one surrounding my desk). But now it, too, seems to have been cancelled.

According to the original decoupling theory, globalization is moving into its next phase. The United States, which accounts for about 30 percent of the global economy, still matters, but global trade isn’t simply manufacturing goods in China and sending them to the United States. With the emergence of giants like Brazil, Russia, India, and China (BRIC), global economic growth would rise as these countries increasingly traded with each other and as they grew vast domestic markets populated by middle-class consumers. So if the United States lagged, the BRIC houses would surely slow down, but they’d still clip along at an enviable rate—say, 7 percent or 8 percent GDP growth for India, instead of 9 or 10 percent. Decoupling had strong political overtones, too. With the erstwhile hegemony struggling with self-inflicted economic (subprime) and geopolitical (Iraq, Dick Cheney) wounds, the rest of the world was busy getting on with its affairs. In a decoupled world, the United States would no longer determine the fate of the globe.

Decoupling worked well for a few minutes. In the first half of 2008, as U.S. financial institutions teetered and data on retail sales, employment, and growth disappointed, the rest of the world seemed to be humming along. But in recent weeks, there’s been a shift. The data flow from the United States has remained largely negative. But the international news suggests we Americans are no longer in the soup alone.

The Eurozone and the United Kingdom now appear to be in recession—or in something very close to it. Eurostat last week reported that the economy of the 15-nation Eurozone shrank modestly in the second quarter while the EU-27 zone, which includes the United Kingdom and faster-growing Eastern European countries, eked out an extremely slim gain. The economies of both Germany and Japan contracted in the second quarter. In September, the Organization for Economic Cooperation and Development updated its 2008 growth projections. And, voilà, the United States was transformed from the weakling of the G-7 (the OECD’s June projections had the United States growing more slowly than the other big economies) to the strongman.

In the second quarter, the G-7 economies were hampered in large part by skyrocketing prices for commodities like metals, oil, and coal. But recent data shows that even geologically blessed nations are slamming on the brakes, too. Australia’s commodity-based economy, which is tightly integrated with Asia, has been growing for 17 straight years. But in the second quarter, as the Australian Bureau of Statistics recently reported, Australia grew only 0.3 percent.

Russia is being hit by a double whammy—falling prices for its biggest exports (oil, natural gas, metals) and a negative reaction to its invasion of Georgia. Russia’s stock market has fallen 40 percent since May. And as the Financial Times reported this week, a Russian credit crunch is taking hold.

Even China is showing signs of faltering. The most worrisome indications aren’t exports. (With the G-7 slumping, they’d be expected to fall.) Rather, China’s domestic market is lagging. As the Wall Street Journal reported, August vehicle sales “fell 6.3 percent from a year earlier to 629,000 units, the first decline since February 2005.” Yes, sales for the first two-thirds of 2008 are up nearly 14 percent from 2007, but that represents a sharp deceleration from 2007, when sales rose nearly 22 percent. The rate of China’s growth of steel production fell in the first half of this year. And the Financial Times reported last week that “growth in Chinese steel consumption is expected to slow markedly in the second half of this year amid weakening demand from the construction, household appliance, and automobile industries.”

For the first two quarters of this year, big multinational companies such as Pepsi and Caterprillar were experiencing domestic weakness and international growth. Federal Express, the delivery giant, is a pretty good barometer of how well the global trade machine is working. In its report for the quarter that ended on Feb. 28, 2008, FedEx sang from the decoupling hymnal. It complained of a weak U.S. economy but was cheered by “growth at FedEx Ground, FedEx International Priority and an increase in international domestic express shipments resulting primarily from recent international acquisitions.” But now? Not so much. Yesterday, it gave an update for the quarter that ended on August 31. The takeaway: “While sustained declines in fuel prices could improve our full-year outlook, the slowing economic growth trends in the U.S. are now extending to other areas of the global economy.”