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US consumers have been one of the main engines of global growth for the past decade. But now, as America's housing boom threatens to turn into a bust, many forecasters expect the economies of China and the rest of Asia to slow. However, this time, the fate of the rest of the world will depend largely upon whether China and the other Asian economies can decouple from the slowing American locomotive. An analysis. The US economy is slowing down. That much we all know. But the question is how much is it going to slow down? The risk of economic recession in the US in 2007 is increasing rapidly. Rather than overly tight monetary policy at the Federal Reserve, the declining value of US homes is undermining personal consumption expenditure. Commerce Department figures showed that the slump in the US housing market was largely responsible for the loss of economic momentum. The data showed a 17.4 per cent annual fall in spending on new housing. During the previous three months the economy had grown by 2.6 per cent. However, some analysts said that consumer spending, buoyed by a fall in fuel prices, would provide a boost to the economy with some forecasting a growth rate of 3 per cent in October to December. According to conventional wisdom, American consumers have single-handedly kept the world economy chugging along, whereas cautious Europeans and Asians have preferred to save. Yet the importance of America's role in global growth is often exaggerated. The real driver of the world economy has been Asia, which has accounted for over half of the world's growth since 2001. Even in current dollar terms, rather than PPP, Asia's 21 per cent contribution to the increase in world GDP exceeded America's 19 per cent. But current dollar figures understate Asia's weight in the world, because in China and other poor countries things like housing and domestic services are much cheaper than in rich countries, so a dollar of spending buys a lot more. A sharp slowdown or contraction of real personal consumption expenditure growth in the US in 2007 will lead to much slower economic growth in Asia. Asia's export growth could be flat or even negative while investment growth could be cut in half. Asia's export growth would certainly slow sharply, but it is the change in net exports that contributes to a country's growth rate, not the absolute size of that surplus. Since 2001 the increase in emerging Asia's trade surplus has added less than one percentage point a year on average to the region's average growth rate of almost 7 per cent. The bulk of Asia's growth has been domestically driven. Domestic demand (investment and consumption) has grown more slowly than GDP over the past year everywhere except in Malaysia. But in most cases the gap has been small, especially in China, India, Japan and Indonesia. Although consumption has fallen as a share of GDP in most Asian countries, this does not mean that households are saving more. Excluding China and India, household saving has fallen sharply, from 15 per cent of GDP in the late 1980s to 8 per cent today. The paradox is explained by the fact that wage incomes have risen more slowly than GDP as production has become more capital intensive. But this means that Asian consumers are spending a rising share of their income by borrowing or running down their savings. Experts believe that though dependent on consumer demand in the United States, Asian economy could easily withstand a US economic recession because of its vast resources and its ability to extend these resources through the still-dominant state-owned economic structures. As a result, slowing US economic growth does not imply a significant reversal in global commodity prices, especially oil prices. Even if economic growth in China slows to 5 per cent in 2007, demand for energy and crude oil in China will remain quite strong. For India, the economy and earnings growth is unlikely to be affected by a possible slowdown in global economy because of its low trade-to-GDP ratio, structural demand drivers (low product penetration, improving demographics, and rising affluence), and a strong capex cycle. Another reason for believing that Asian economies can decouple from an American downturn is that most of them have small budget deficits or even surpluses. This means they have plenty of scope to ease fiscal policy to support domestic demand so as to offset some of the fall in exports. When America sneezes, the rest of the world's economies may no longer catch a cold.
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