A Decoupled World Can Thrive Despite a Weaker U.S. Economy

global economy
global economy

The decoupling debate has been largely put to rest by the latest evidence from the U.S. economic slowdown. Now, Wall Street economists now say the world can cope with a weaker U.S., Bloomberg News reports.

Three years ago, the financial crisis that hit America spread across the globe, dragging the world into its deepest recession in seven decades. But now, as the world is finally emerging from the recession, the U.S. recovery is losing its momentum. Will it drag the world down with it again? Economists say no: This time, if the U.S. sneezes, the world doesn't have to catch a cold.

The experts suggest that international reliance on U.S. trade has declined to the point where lingering U.S. pain doesn't have to spread. In addition, foreign economies have room to grow that the U.S. doesn't, partly because of the U.S. housing slump. Also, unlike the U.S., many countries avoided asset bubbles, kept their banking systems sound and improved their trade and budget positions over the past decade.

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In fact, many predict high growth rates in developing nations, but low growth in developed countries, and the gap in growth rates is already widening, Bloomberg quotes David Lubin of Citigroup (C).

That's not all. According to the World Bank book The Day After Tomorrow, which Bloomberg quotes, developing nations aren't merely decoupling their economies from the U.S., they're undergoing a switchover, becoming the drivers for the world economy, and that their growth could help rescue advanced nations.

While some remain skeptical, even the decoupling proponents say that the rosier scenarios are all contingent on the the U.S. pain remaining contained. Based on its decoupling scenario, Goldman Sachs (GS) expects a weakening dollar, higher bond yields outside the U.S., and stronger emerging-market equities -- unless American issues put the world's financial markets on tilt again.