08/11/2007
'Not only – but also'
The US is still the world’s largest economy, the most dominant driver of global trade and capital flows and subject to the most comprehensive economic analytical attention. However, the next two major economies, Japan and Germany, warrant attention in their own right. Unlike the US, they are more export orientated and therefore useful as a barometer of wider global economic health. If the US sneezes, does the rest of the world still catch a cold?
The German manufacturing sector is regarded as the powerhouse in Europe and the number one global exporter. Sentiment in that sector has been diminishing at an accelerating pace since mid-year. New orders, including those for export, are falling, and order backlogs are shrinking rapidly. Export growth has slowed as demand growth has weakened in the US; it is estimated that half that slowdown can be attributed to the US and a further third to slower Asian demand. Additionally, the deterioration in sentiment is not confined to manufacturing. Business expectations across the service sectors of the economy have hit a 4 ½ year low, whilst retail sales are some 2% lower than a year earlier.
A similar story emerges from looking at the Japanese economy. There, the outlook for manufacturing has been in decline for over a year, and the level of activity is now actually contracting. Employment growth is falling, not only within manufacturing, but also in the service sector and in construction. This does contrast with the situation in Germany, where the labour market is still healthy. However, it does underline the vulnerability of the Japanese economy to global trade. It has been argued by many that, since Japan has become less reliant on exports to the US, it should be less vulnerable to a US slowdown. However, that overlooks the extent to which the US still dominates global trade flows. Consequently, the growth in overall Japanese exports in September was the slowest in two years. Yes, exports to the US slowed, but trade with Asia in general, and China in particular, also decelerated sharply.
Our warning is simple: the global economy still remains vulnerable to a hard US landing, and neither Germany nor Japan is immune. The de-coupling thesis is not yet proven!
Douglas Roberts, Senior International Economist, Standard Life Investments.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
Standard Life Investments may record and monitor telephone calls to help improve customer service.
All companies are authorised and regulated in the UK by the Financial Services Authority.
©2008 Standard Life Investments.
RSS Press Articles