Decoupling and Global Markets

The piece below comes from the FT this morning, if you want to know my take on all this go over here.

Markets unsure if they will decouple from US

Global markets are reflecting unease that a deteriorating US economy, which comprises about 25 per cent of total world activity, could torpedo the notion that Asia and other countries can "decouple" from a sickly North America.

China's Shanghai index fell below 5,000 this week, the first time since August, and is now more than 17 per cent lower since setting a record high in mid-October.

The big fear is that the US consumer, battered by record high energy prices, a collapsing housing market and a growing credit squeeze from banks will have no choice but to rein in spending.

The consumer is responsible for about 70 per cent of US economic activity. Any pullback, argue some analysts, will lower global growth, particularly for those countries that rely heavily on exporting goods to the US.

"As to whether a US recession would spill over to the rest of the world, opinions are split,'' says Marco Annunziata, chief economist at UniCredit Markets. "Some strongly believe in decoupling and look forward to watching the giant collapse, while the rest of the world powers on, while others believe we would all be hurt.''

At this juncture, the outlook for the US economy is for an extended period of much slower growth starting in the present quarter, but not a recession. Lehman Brothers forecast a 30 per cent probability of a recession starting before the end of next year.

The key factor to watch is the labour market, argue economists. So long as unemployment does not rise sharply from its level of 4.7 per cent, the consumer should weather the storm.