Rebalancing and De-coupling ... A Revisit
While the subprime market credit crunch is continuing at full swing in the US I thought I would revisit some old but dear topics here at Alpha.Sources, namely those of global re(im)balancing and decoupling which are of course becoming ever more interesting topics as the risk of severe slowdown/recession in the US mounting. For general comments on the progression of the housing market woes in the US I recommend this excellent article by Gretchen Morgenson from the NYT (hat tip; Mark Thoma, and Felix's rebuttle of course) as well as of course Nouriel Roubini and Calculated Risk who are both following the situation closely. Well, that is it on the US housing market and I will say no more about it.
However, as I said above I would like to revisit some other big themes in terms of the global economy and in doing so I am of course moving into 'Brad Setser land' but as he and I have been discussing this before I am merely picking up an old tradition. Actually, I don't think I am going to diasgree much with Brad on this. First off we have of course China which in my opinion represents the biggest nut to crack in terms of de-coupling since I am not still not confident that the Eurozone and Japan can contribute to a sustainable re-balancing process. In many ways, the whole discussion about de-coupling is a bit behind the curve I think at least in the way it is usually packaged. In many ways the Economist has been providing the most prominent slew of comments in favor of de-coupling from the US economy and in to a large extent I am not critical of the notion itlself. In short the rest of the world (most notably China, India, and Brazil) have already de-coupled from the US in the sense that they are going to account for an ever large share of world GDP as we move forward and if you were in doubt this argument is also taken from a recent the Economist survey on the global economy edited by the clever Pam Wodall. So far so good then in my agreement with the Economist. Well, this is not entirely true and where I am especially critical towards the whole issue of de-coupling from the US is when I hear that Japan and Europe/the Eurozone is lumped together with Asia. First of all the story holds as far it goes in terms of the how China/Asia is becoming increasingly important export markets for the European as well as the Japanese economy. Now, when it comes to Japan's ability to de-couple through reverting to a growth path driven (more) by domestic consumption I am very skeptical primarily for structural reasons which are outlined in this note over at GEM. Turning to Europe, it obviously becomes more difficult to asses and this is also part of the issue since Europe or the Eurozone for that matter will not be able to contribute in unison to a rebalancing of the imbalances. In terms of de-coupling from a US slowdown/recession some countries will then fair better than others and for example export dependant Germany is important to watch here I think especially in terms of the lagged transmission mechanism between a US slowdown, the Chinese economy and then German and Japanese exports. But what about China then ... well this is where I think Brad Setser will be of assitance. The point is that although China of course boosts as a big import perform which indeed drives capital spending in other countries its export performance just keeps on racing ahead reporting one mind boggling growth clip after the other. As such, the most recent data comparison shows an interesting aspect of the current trend in the Chinese economy. First of all we have the apparent evidence that the Chinese efforts to slow down investment relative to consumption (i.e. moving towards de-coupling) with a respectable growth clip of retail sales of 12.5% in January and February of 2007. Meanwhile, the notions of China de-coupling from exports and as such re-balancing does not seem to hold up for scrutiny since in the same period exports outpaced imports by a notable margin as Brad Setser demonstrates in a recent post which also notes rather interestingly that Europe (on an aggregate level!) is widening its deficit with China which of course only adds further to the imbalances although it also points to the European's economy's ability (again remember we are talking the aggregate level here) to run on domestic demand. Staying with China for a while I also want to show you some intersting graphs from the latest quarterly update from the World Bank Office in Beijing (PDF). The first graph shows the contribution of net exports of quarterly GDP growth figures since 2005 which shows a steady increase since Q1 2006.
The second graph is also very interesting and shows the share of private consumption to GDP in China since 1993 and as you can it is one of secular decline something which of course China is trying hard to revert.
More to Come
Well, I will leave you now but there are still some rather important questions to answer in terms of re-balancing and de-coupling from a US slowdown/recession. More specifically, I think there is a notable curreny aspect here and although most people at moment seem pretty convinced that any downward move by the Fed to ease liquidity conditions for troubles mortgage markets would cause a crash in the Dollar I am not so sure I buy this since as I have been arguing before a fall in the Dollar in a world where the PBoC still pegs would have to happen on the back of the Yen and Euro and this is where I think the chain falls off in terms of the whole de-coupling/re-balancing scenario since I just do not see this happening to a sustainable degree. Of course, as Setser would no doubt point out, now would be a good time for China to float the rmb :). Lastly, I also think that I should hone up to my rant about not looking at Europe on an aggregate level or at least to try to differentiate the analysis by grinding down to the country level data. Time is of course always of the essence, especially at the moment since I am working hard on a paper to finish up my bachelor degree but I will move forward slowly but surely perhaps also through some notes on GEM.