Archive for May 11th, 2007

What happens if US economy slows down?

May 11, 2007

I am going to my hometown, Firozabad for a week. I am not sure if I would be blogging from there. Anyways, here is some food for thought:

1. I was reading the World Economic Outlook, April 2007 (for the uninitiated IMF takes out a bi-annual report on World Economy. It is by far one of the most intriguing analysis). Most of the analysis is usual self — how much economies would grow, the factors which could produce higher growth and factors which could reduce growth. Summary is US would slow down but nothing to be really threatened about. The IMF people have lowered down GDP growth estimates to 2.2% for 2007 which is 0.7% lower than the last WEO in Sep, 2006.

The question is why only comment about USA alone? Well the answer is in Chapter 4 which talks about the spillover effects in the World Economy due to slowdowns/recessions elsewhere basically in US, Euro Area and Japan. The chapter tells me that US GDP is about 22% of World GDP, Imports about 20% of World Imports and has 45% of World Market Cap nad hence we need to look more into USA than any other region.

The chapter has some excellent event studies and has analysed the impact on World Economy in the previous 5 recessions and 2 mid-cycle slowdowns (some technical term which means not a recession just a slowdown). The summary is recessions are many types. There have been instances when recession in US is basically due to home factors like in 1991 when there was Savings & Loan crisis and in 2001 when there was a global slowdown. So obviously the effect is most felt in 2001 than 1991.

The net summary is:

1. Recent slowdown in US is mainly because of problems in US economy hence we do not see much impact of US slowdown on world economy.
2. The phrase that “if US sneezes rest catch cold” is true as the world does slow down but the spillover effects are not as big as stated in the media and elsewhere.
3. Moreover, spillovers have been increasing with time.
4. More than global factors, it is regional factors that are more important.

Read on.

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