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Decoupling Redux?

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Stephanie Flanders | 14:25 UK time, Wednesday, 8 July 2009

The global recession is dead. Long live the global recession.

That is the basic message of the IMF's latest economic update. Overall, it thinks global output has probably stopped falling in the past few months. But that's almost entirely due to better economic times in China and India. In the advanced economies we'll be feeling the pain for some time to come.

It's a remarkable sign of the times that the global economy could be said to be growing, even as the US and the euro area - responsible for at least 40% of global GDP - continue to shrink.

As the chart below shows, the Fund's economists have decided that the emerging economies might be able to "decouple" after all, at least the ones in Asia.

IMF's global GDP growth chart

They do think the advanced economies might start to recover earlier than previously forecast, with very modest growth towards the end of this year. The US forecast for 2009 has been nudged up a little, and it's now expected to grow by 0.8% in 2010, instead of not growing at all.

And the UK forecast for next year is also up, with growth of 0.2% now in 2010 instead of another year of decline (though the forecast is down a little for 2009 - thanks to that unexpectedly bad out-turn in the first few months).

But all the action for the next year or two is expected to be in the developing countries - or, to be more precise, India and China. China is now expected to grow by 7.5% this year and 8.5% in 2010.

For India the figures are 5.4% and 6.5%. All these forecasts are about a percentage point higher than they were in April.

As you'll remember, "decoupling" was all the rage in 2007, though the term meant different things to different folks.

The weaker version of the theory was simply that the emerging economies might be able to continue to grow, even if the US and other advanced economies did not.

The stronger version said that China, India and the rest could not only grow in the face of a recession in the West, but actually help to pull our economies out.

When the crisis in the advanced economies hit demand for emerging market exports last year, all versions of the decoupling thesis started to look painfully naive.

As the chart shows, most of these economies were dragged into recession as well. But one year on, their recessions look likely to be a lot briefer, and more "V" shaped than ours.

It may not be true decoupling - as the IMF warns, the recent acceleration in growth in some of these economies could peter out if the advanced economies fail to pick up.

We also have to remember that most of these economies, with their rapid population growth, need much faster growth than we do, to achieve any growth at all in income per head. Their "normal" growth rate is a lot faster than ours.

But the idea that the emerging world can get along OK without us looks slightly less mad than it did.

Yes, the collapse in world trade has hit the developing economies hard. The IMF now expects the volume of world trade to shrink by more than 12%, even more than before. And the rich economies have been buying much less from the rest of the world - their imports are now expected to fall by nearly 14% in 2009. That has affected the demand for developing country exports, but not by as much as you might have thought.

Overall, their exports are expected to fall by "only" 6.5% this year. Of course, some have been hit harder than others. But if you are China or India, decoupling lives - at least in the weakest sense of the term. Whether either of these emerging behemoths can help speed up our own slow return to economic health is another matter.


  • Comment number 1.


    "It's a remarkable sign of the times that the global economy could be said to be growing, even as the US and the euro area - responsible for at least 40% of global GDP - continue to shrink."

    The thing is, we don't live in a global economy. The PRC is still a communist state and if it, along with its SCO allies (and interested potential member states) are growing whilst the Liberal-Democracies are shrinking (economically and demographically), that's a political coup for state 'socialism' (with many faces) is it not?

  • Comment number 2.

    First of all, any information about economic growth in China, if gained from the Chinese should be considered suspect. They and India have finally realized that the development of internal markets are needed and if they can create a middle-class this will lead to a more stable economy. In this process consideration should be given to the labor markets in the different countries as well as production costs. China, where in some areas slave labor is still in vogue as well as a cheap labor force as the poor stream to the cities looking for work that will pay more than scratching dirt and in India were the same situations exist. Because of the lack of labor and environemntal regulations, what are referred to as developing economies, do not have these costs associated with production. The Free Market crowd seems to find this all proper as it produces high profits and any consequences fall on the individuals or as having been found out in the West, to the taxpayers that are asked to support disabled and older workers, injured due to employer negligence and poor working conditions, or the clean up of toxic and other hazzardous waste left by companies and limited inpections related to health standards for products. This has also lead to the dismantling of the middle-class in the West. Unfortunately, Nations, as such, have been taken over by the industrialist and/or investment groups that have little or no concern for the stability of a national economy. They are pure captialist, motivated only by profit. Nationalism, in economic terms creates a stable politic that provides for social stability, again not a concern of the Free Marketers. As the "leadership" or rather representatives of investors, meet to shore up a system that is failing many, it is time to consider or reconsider the structure of a global economy as it is plain to see that competition based on uneven rules leads to profits for some and reduced standards of living for others. China and India will both suffer the conequences of their current economic policies but by that time the West may be an economic shell. Growth and production charts do not reflect the negative impacts on societies nor the potential for political instability created by a limited assessment of what defines profit and costs.

  • Comment number 3.

    #1. JadedJean wrote:

    "that's a political coup for state 'socialism' (with many faces) is it not?"

    Why does this bother you?

    You have argued (from your nihilistic point of view) that nobody can successfully impose anything on anybody, but now you seem to be decrying the successful imposition of an economic management system of 'socialism' with Chinese characteristics! (I would argue that it is not socialism, anyway.)

  • Comment number 4.

    Stephanie I think there is still some confusion about the whole scenario, the so-called decoupling included. The key factor responsible for the current situation is that marketing of all goods and services became too aggressive, virtually forcing consumers to buy what they did not need. In the process, million of jobs were created that had no utilitarian value for humanity. Now consumers are refusing to bite the baits and those jobs have evaporated. Artificially jacked up demand for financial services (I do not see why anyone should be moving his/her money ten times a day from one instrument to another), automobiles, airplanes, consumer durables, hotels, etc. has plunged. Just cut the world economy at least 10%, assume the man on the street has to cut debt by at least 25% and then calculate how long it will take to recover. I don't think you can get a figure of less than five years and that would hold only if steps are taken to correct the distorted composition of consumption. Want to talk more, email me

  • Comment number 5.

    John_from_Hendon (#3) #1. JadedJean wrote:

    "that's a political coup for state 'socialism' (with many faces) is it not?"

    Why does this bother you?"

    Do you read tea-leaves? How did you infer that it bothered me from my post? It was a statement of fact, like statements in many of my posts. You can not reliably infer personal views from my posts, in fact, you clearly still need to learn why intensional contexts are dramatic and creative, and why, as a consequence, they are anathema to rationality.

    Try to learn from what I say. It will be to your advantage.

    Stephanie - I suggest you add a graph at the end as an update showing each country's graph, as it would be far more informative than those misleading composites. The IMF and World Bank have had some odd people working for them over the years. Not too long ago, Jeffrey Sachs (of 'let's spread libertarianism' to Russia fame) was saying that we are 'bursting at the seams' demographically - but who is the referent for 'we'? For the Liberal-Democracies this could not be further from the truth - in fact it's the opposite of what's true, as we're heading towards biological extinction in the long run, which is definitely not good for the economy ;-).

  • Comment number 6.


    Stuart Rose gets 60% of shareholders vote, how much of that is banks/pension funds etc holding shares in nominee accounts where they have the voting rights? Since the Big Bang, being a shareholder doesn't mean you have voting rights. That goes to the people in Financial Services holding your pension fund or shares for you.

    In fact, as I have said elsewhere, this would make for a very good series of articles on how a minority of people can get control over the economy by going into the Financial Service Sector....

  • Comment number 7.

    I wish people would stop using the US as a benchmark.

    The US economy is doomed and will likely never recover to what it was even two years ago. No matter how "rich" the US was considered, your average middle-class family had less spending power and overall financial prowess than their UK counterparts but this was only offset by a lower cost of living.

    Cut the US out of the equation and forget about it. The country is an albatross slung around the world's neck and the world can recover just fine without it; indeed, seeing as it was greedy American financiers that started this mess with greed and catastrophically bad judgment I think it half serves them right. India and China are the future, the US has had its day and I am with the school of thought that says it'll end up like Japan was before all this started - not in recession but not growing either.

  • Comment number 8.

    British_Lion (#7) Yes, but people need to look very closely into the people and processes which brought about that destruction in the USA as it is also being brought about here. It's not the first time that this has been done. Perhaps we should be listehing to those who talk of the 'Big and Little Satan'? Why are our critics so eager to curtail the freedom of women? Why are they do eager to ban pop music? Do we have some unpalatable truths to re-learn?

  • Comment number 9.

    It comes as no surprise to find that China along with India are coming out of their respective Recessions ahead of everyone else, for if anything it will be these 2 Nations that will have the capacity to swamp the World with Global products, being able to manufacture Goods at a far cheaper Market Price then anything that can be matched or offered here in the U.K.

    In the future ahead it looks like the U.K. will be NET consumers of more Global produces in terms of GDP, than it will ever be able to Export at any competitive Prices in the World Market place.

    The up-coming problem we face here in the U.K. is that London will lose its position as a Leading Global Centre, whereby the likes of Tokyo will expand at London's expense, and this bring about a re-thinking of Britain position on the World Stage, for it will be very hard to see that ANY British Government will be able to find the funds to re-shape the British Economy given the ever rising mountings of both Government and Personal debts that will have to be re-paid before we can begin to afford to save additional Capital to fund any National restructuring to fit in with any up-turn in World demands.

    There will therefore be a gap of between the next 7 - 12 Years before we MAY BE able to re-align any NEW Industry to catch up with the likes of both China and India for any long term substainability for Growth in the U.K. Market Place for wealth creation.

    With the U.K.'s general Market conditions set to further decline, or NOT rise inline with Global outputs, U.K. Unemployment WILL also continue to rise for well beyond the next 1 - 3 Years, ending and levelling off at around 6-7 Million in real terms, and staying at that level right up until around Year 7 when it will start to decline slowly with the onset of renewed investment coming on stream.

    Whether in the mean time we have a Labour or Conservative Government, this will NOT in any real terms either one way or the other effect or change the course of any projected U.K. outcomes in the Medium to Long term.

  • Comment number 10.

    Referring to the below as examples, it is clear that in Asean at least, the Yuan is intended for international trade and as a regional replacement for the dollar.

    Should the IMF, World Bank, WTO and others not demonstrate less pro-US favouritism, regional equivalents of those institutions may ultimately emerge there.

    However, I would see this as a back up plan. I still think the most likely route is some kind of tempered decrease in trade imbalances, probably through the use of SDRs as a kind of bancor (ie, interest charged on surpluses AND deficits, as disincentive to imbalance)


  • Comment number 11.

    Finally, for a sane and rational take on the IMF report, take a look here.

  • Comment number 12.

    Nice graph but wrong.

    The supposed recovery did not start until the first quarter in 2009.

    I am unconvinced that it is a recovery, more a recession in the madness.

    Any decoupling is that between rationality and absurdity.

    The next dip is the real economic recession.

    Sorry: full of gloom this evening. No doubt my Celtic Presbyterianism getting the better of me, eh JJ?

  • Comment number 13.

    If you're German then you should find this to be good news.

    As I've said before the Germans and French and most other countries will come through this mess with their industries a bit dented but generally intact. In the UK we'll have a bunch of very badly damaged financial institutions and little else.

  • Comment number 14.

    #7 British_Lion. It is unlikely that the US will allow themselves to be ignored. The US accounts for 25% of world expenditure on weapons and arms. It has not gotten itself into this position by accident or without thought.

  • Comment number 15.

    Re: 13 Wee-Scamp,

    Indeed I agree with your observation that all we have left in the U.K. is some very bably damaged financial institutions and very little else left from what was once a Britain that had many Captains of Industries and Textile.

    For what could go wrong with everything British has now well and truly gone wrong.
    So while it is easy to drell on the bad points, I am increasingly finding it very hard to drum-up any good pointers that can be credited with any staying power in any future events.

    Today, we have rising Unemployment that will cast a very long shadow over everyones future working lifes, whereby the once Middle - Classes are losing their Jobs at a rate whereby the "term" Middle - Class will cease to exist, opening up and widening the gap of the Rich and Poorest to levels not seen in the U.K. since after the Second World War back in 1945, while adding to this the further widening and dividing gap between North and South which is also happening at an alarming rate.

    Gone are the Days when the Nu-Labour slogan was Education, Education and Education for no one at this moment in time is able to second guest what forms of Education in needed and in what areas of Training to prepare and re-skill for next, in any future up-coming Industral Revolution after our Recession has ended.

    Add to this the prospects of massive Youth Unemployment other the next few weeks when School - Leavers come onto the Jobs market, for even after the raising of the School leaving age to 18 Years, there will be very limited places in Higher Education at Collages or Universities what with the ever increasing Cost, and lack of placements.

    The Government pledge to this short-fall is to find Training or Apprentice-Ships for those whom have reached the Age of 25 regardless, meaning we have a lost Generation between the Ages of 18-25 Years, with NO prospects and NO guarantees of a Job for Life let alone a training course leading towards a Full time Job.

    So while it is somewhat quite simple to speculate on matters that may be the way ahead for the U.K. Economy in the future, we really don't know just where we really will be tomorrow or next week let alone how, or when our Ecomony, and Industral out-puts will pick up, or not, over the coming intervening period towards long term.

    So will the U.K. Economy fall to its lowest then level out, or will our Economy "Double-Dip" or more??? Who can truefully say they really know?

  • Comment number 16.

    #12 stanillic,

    Couldn't agree more.

  • Comment number 17.

    Just one question, how much of the chinese growth is real growth and how much is simply government spending, which is ultimately a drain on real economic growth?

  • Comment number 18.


    "So will the U.K. Economy fall to its lowest then level out, or will our Economy "Double-Dip" or more??? Who can truefully say they really know?"

    Well, I'll repeat this one because I feel this is worth reading in its entirety:

    Look for example at the graphs of market rallies and the comparison with the 1930s and also look at the link to "The Tale of Two Depressions". Also notice how unemployment is correlated with deleveraging in that graph there - and particularly how government debt increases are greatly offset by private debt reductions, thus invalidating any positive prognosis of fiscal stimulus

  • Comment number 19.

    While it always an handy tool to look back in History to see the mistakes of these past era's, and how things took there course during the Great Depression of the 1930's and the likes, we also have to remember that back in those times past Countries such as China and India were not upon the verge of breaking out from being a Third - World underclass, to start their own Modern Industral Revolutions.

    Therefore, just where this takes us today in relation to past events in History is un-clear, because todays Tale is all about recoving from a World Recession, and just quite where that will leave ANY Country in relation to all others in the Land of any renewed fiscal stimulus, and more over where any NEW found stimulus will come from and grow STILL remains UNCLEAR.

    We can ALL have a go at trying to Second-Guess any outcomes, but then that is just what many are now doing.



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