It turns out the US economy matters after all.
The credit collapse and dollar decline that followed a surge in US home foreclosures jeopardize expansions in the UK, Canada and Germany, economists said. They also debunk "decoupling," an argument advanced by analysts at Goldman Sachs Group Inc and Morgan Stanley that the world wouldn't suffer as it did during US slowdowns in previous decades.
The Bank of England and Bank of Canada this week followed the US Federal Reserve in cutting interest rates, and the European Central Bank lowered its growth forecast for next year. British policy makers reduced their benchmark rate yesterday, even after Bank of England Governor Mervyn King expressed concern about inflation just two weeks earlier.
"2008 will be the year of `recoupling,'" said Peter Berezin, an economist at Goldman in New York, explaining his firm's about-face. "What began as a US-specific shock is morphing into a global shock."
Of the 38 countries they monitor, Goldman economists expect growth to slacken in 26 and strengthen in a dozen. That will cause global growth to slow to 4 percent next year from 4.7 percent this year, with Europe and Japan fading faster than the US, they say.
Market lending rates have risen worldwide in the last three weeks as US$70 billion of writedowns linked to defaults on US subprime mortgages fanned international concern about the strength of financial institutions.
Decoupling is "a good story, but it's not going to work going forward," Stephen Roach, head of Morgan Stanley in Asia, said in an interview in New Delhi on Sunday.
His colleague, Stephen Jen (任永力), said in a report last week that because the possibility of a US recession has increased, so has the chance that the rest of the world will falter.
Higher market rates pushed up the cost of lending everywhere, making it costlier for companies and consumers to fund new spending or investment. The cost of borrowing euros for three months, for example, this week rose to a seven-year high.
"Initially the impact of the subprime crisis was on the US directly, but what we're seeing now is a more insidious paralysis of credit conditions moving across different markets and economies," said Brian Hilliard, director of economic research at Societe Generale SA in London.
The dollar's decline in sympathy with its economy is also exacting a price overseas. Airbus SAS may cut its 2 billion euro (US$3 billion) research budget to trim costs as the dollar's dive becomes "life threatening" for the world's largest planemaker, chief executive officer Tom Enders said Nov. 23.
At the same time, US consumers are starting to retrench in the face of declining home values and rising energy bills as oil prices near US$100 a barrel. The Conference Board's index of consumer confidence decreased last month to the lowest since the aftermath of Hurricane Katrina in 2005.
Wolseley Plc of the UK, the world's biggest distributor of plumbing and heating equipment, said on Nov. 28 that first-quarter pretax profit through October fell almost 15 percent after US revenue declined 10 percent.
"The American consumer is the big gorilla on the demand side of the global economy," Roach said. "As the slowdown goes from housing to consumption, we'll find the world is not as decoupled as it thinks."
UK monetary policy makers cut their key rate on Thursday for the first time in two years to 5.5 percent, pointing to deteriorating financial markets.
The Bank of Canada cited "global financial market difficul-ties" as it lowered its main rate by a quarter point to 4.25 percent on Wednesday.
Tai Hui (許長泰), the head of Southeast Asian economic research at Standard Chartered Bank Plc in Singapore, also doubts Asian's economies can weather a collapse in US consumer demand, with Hong Kong, Taiwan, Malaysia and Singapore at particular risk from reduced exports.
On the other hand, Alex Patelis, head of international economics at Merrill Lynch & Co, is confident "the time has not yet come to call the end of this global upturn," citing demand in emerging markets such as China and Russia.
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