The near-universal character of this month's global financial markets plunge came as a surprise to many people. After persistent growth in recent years in countries such as India and China, Goldman Sachs, Merrill Lynch and JPMorgan all had assured investors that the world no longer depended upon the U.S. economy.
"Who Needs The U.S.?" scoffed Time magazine last year.
That once fashionable belief in global "decoupling," however, has been deeply shaken, if not obliterated, by Wall Street's recent upheaval and a cascade of downbeat economic reports suggesting the $14 trillion American economy may be starting to shrink. "What decoupling?" says Nariman Behravesh, chief economist of the consulting firm Global Insight. "You hear a lot of talk of recoupling. No one's talking of decoupling."
Around the world, government ministers, corporate executives, workers and investors all are nervously reassessing their vulnerability to this made-in-the-USA crisis. Chinese textile mills sold almost $1 billion less to U.S. customers in November than they did in October, in part because the falling dollar is making imported goods more expensive. European banks executed a "sharp tightening" in lending, especially to businesses, due to potential losses on complex mortgage-backed securities, according to a European Central Bank survey. And Argentina's central bank chief says all of Latin America anticipates a hit to economic growth if the U.S. outlook darkens further.
"It affects everyone. The whole world is watching the ups and downs of the U.S. economy," says Le Cong Phung, Vietnam's ambassador to the United States.
The health of foreign economies likewise is increasingly central to the prospects of the largest U.S. companies. With the U.S. economy stalling, iconic brands such as McDonald's mcd and IBM ibm recently reported strong earnings that derived largely from foreign markets. Heavy-equipment maker Caterpillar cat last week reported that its sales in the fourth quarter fell 11% in North America while rising 36% in Asia, 34% in Europe and 17% in Latin America.
"Inside the U.S. economy, it was a weak quarter for many of the industries we serve. Outside the United States, almost everything was up," Mike Dewalt, Caterpillar's director of investor relations, said on a conference call Friday.
Almost $7 of every $10 in sales that Caterpillar records comes from outside the USA. The Peoria, Ill.,-based manufacturer is banking on strong foreign growth to compensate for an "anemic" U.S. rate, and to produce 2008 sales 5% to 10% above last year's $45 billion. But the expected bounty depends on Europe growing at an annual rate of 2.3%; most other forecasters, including the International Monetary Fund, have lowered their estimates to around 1.6%.
The outlook darkens
Taking account of the worsening financial turmoil, the IMF on Tuesday lowered its global growth forecast. The world economy will slow this year to a 4.1% annual growth rate, down from 4.9% in 2007, and 0.3 percentage points below its original forecast, the IMF said. Much of the blame for the global deceleration lies with the crisis in subprime mortgages, those for borrowers with poor or non-existent credit histories, that began in the USA. "The financial market strains originating in the U.S. subprime sector … have intensified," the IMF said.