The Decoupling theory is that emerging economies like China and India are decoupled from the US economy. The view is that the emerging economies on one hand and US economy are now very less related. How good is that assumption?
If we look merely at the GDP growth figures China and India are accelerating at 11% and 9% per annum, while US is in a slow growth phase an may even enter into recession in the coming year. This may help us in believing the decoupling theory and that China and India can keep on growing without getting affected from the US economic condition.
If we look slightly deep into it and look at two major sources of GDP: consumption & investments, we will find that although US economy has experienced a slower growth, its consumption is in healthy growth phase, and the slowdown in overall growth is mainly because of slowdown in investment activities from US firms. The reason may be that a lot of money is moving in the form of FII and FDI to India and China. Even China and India export heavily to US, so a slowdown in consumption in US is bound to affect these countries, though the extent of the damage may be different.
Investors who believe in decoupling theory think a well diversified portfolio across Asian and American countries can give good returns even in the case of US recession. That may be too optimistic assumption and this is one of the factors behind the huge rally that was seen in the Chinese and Indian stock markets in the past year. But the recent tremors shook the belief and markets all over the world fell sharply in two days following news on US economic recession.
Earlier during the subprime crisis the decoupling theory got seriously challenged. The credit crunch that followed was not a US only phenomenon, though US was hard hit. The decoupling theory also underestimates the fact that economies are in era of globalization, and recession in one big economy is bound to cause some pain in other economies.
If we look at world economy, US constitute about 22% of world GDP, while China is about 11%, India 4.6% of world GDP. So if the world economy has to grow, a recession in US economy has to be countered by a bigger increase in other economies. The decoupling theory also suffered some blow when World Bank issued that Chinese and Indian economies are smaller than that estimated earlier.
The year ahead will only tell us how independent these emerging economies are from US and whether their growth can compensate for the world slowdown if US economy goes into recession.
If we look merely at the GDP growth figures China and India are accelerating at 11% and 9% per annum, while US is in a slow growth phase an may even enter into recession in the coming year. This may help us in believing the decoupling theory and that China and India can keep on growing without getting affected from the US economic condition.
If we look slightly deep into it and look at two major sources of GDP: consumption & investments, we will find that although US economy has experienced a slower growth, its consumption is in healthy growth phase, and the slowdown in overall growth is mainly because of slowdown in investment activities from US firms. The reason may be that a lot of money is moving in the form of FII and FDI to India and China. Even China and India export heavily to US, so a slowdown in consumption in US is bound to affect these countries, though the extent of the damage may be different.
Investors who believe in decoupling theory think a well diversified portfolio across Asian and American countries can give good returns even in the case of US recession. That may be too optimistic assumption and this is one of the factors behind the huge rally that was seen in the Chinese and Indian stock markets in the past year. But the recent tremors shook the belief and markets all over the world fell sharply in two days following news on US economic recession.
Earlier during the subprime crisis the decoupling theory got seriously challenged. The credit crunch that followed was not a US only phenomenon, though US was hard hit. The decoupling theory also underestimates the fact that economies are in era of globalization, and recession in one big economy is bound to cause some pain in other economies.
If we look at world economy, US constitute about 22% of world GDP, while China is about 11%, India 4.6% of world GDP. So if the world economy has to grow, a recession in US economy has to be countered by a bigger increase in other economies. The decoupling theory also suffered some blow when World Bank issued that Chinese and Indian economies are smaller than that estimated earlier.
The year ahead will only tell us how independent these emerging economies are from US and whether their growth can compensate for the world slowdown if US economy goes into recession.
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1 comment:
nice article i can say everybody can easily understood this
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