With US non-farm payrolls posting an unexpectedly strong 200,000 gain in December and German industrial orders now shrinking, are we about to see a great transatlantic decoupling?
Germany was always vulnerable to the chill winds blowing in from southern Europe. A greater proportion of German exports goes in aggregate to Italy and Spain (9.8 per cent in 2010) than to either the US (6.9 per cent) or China (4.9 per cent). While German companies are usefully exposed to demand for capital goods from the emerging world, the European Union remains by far Germany’s biggest export market. Demanding austerity from fiscal sinners is all very well but German exporters are now being presented with the bill: export orders are clearly in retreat – and not only to destinations within the eurozone.
At first sight, the December payrolls gain, alongside a further welcome drop in the unemployment rate, suggests the US has some degree of economic immunity from the eurozone crisis. Decoupling may be a dirty word but it does, occasionally, happen. After all, the US decoupled from Asia following the 1997 Thai baht crisis.
At the time, economic and financial Armageddon seemingly beckoned. Asian economies were in a state of meltdown, the western world was heavily exposed to trade with Asia and it seemed obvious that the US economy would be brought to its knees. Business surveys at the time supported this view.
Instead, the US went from strength to strength. Within the space of two years – helped along by rapidly rising equity markets – the Asian crisis was largely forgotten. In its place came the productivity miracle otherwise known as the “new economy”.
Other than the good fortune that comes from unexpected moments of technological advance and the willingness of Americans quickly to embrace these new technologies, the resilience of the US economy stemmed from a reversal of capital flows. Money that had been routinely flowing into Asia in the mid-1990s headed elsewhere and, in particular, to the welcoming arms of Uncle Sam. Bolstered capital inflows allowed the US to run a bigger current account deficit alongside a stronger dollar (which kept inflation in check) and lower interest rates (which boosted domestic growth). Seen this way, the new economy was born out of an external crisis.
Could the same thing happen again? At the beginning of 2012, there’s certainly a more optimistic attitude towards “brand USA”. Notably, the dollar is up, helped along by continued eurozone unease.
Compared with the late-1990s, however, there are also some big differences. Back then, payrolls gains were running at 300,000 or more a month, growth was ticking along at 4 per cent, the housing market was a picture of health, the word “subprime” had not yet been invented and the financial system worked (often a little too well).
Today, the US is vulnerable to the eurozone crisis both via trade and through its myriad financial connections. Bond yields can’t fall much further. The housing market is in the doldrums. There is no room for a “Greenspan put”, at least not of the conventional kind. And the US, even more so than the eurozone, has a terrible fiscal outlook.
Significant decoupling can happen, but only if the domestic conditions are right. For the US in 2012, sadly they are not.
Stephen King is group chief economist at HSBC