Issue of the week: Will the U.S. lead the world into a recession?

“It was a nice theory, anyway,” said Marcus Gee in the Toronto Globe and Mail. Until this week, an idea known as “decoupling” had gained increasing respectability among economists in the U.S. and Asia. Because non-U.S. economies were conducting a growing amount of commerce with one another, the theory held, “their markets had become ‘decoupled’ from the powerful locomotive of the United States.” That notion was dramatically debunked this week, as stock markets around the world were pummeled by fears of a U.S. recession. On Monday, Mumbai’s Sensex index suffered its second-biggest fall ever, plunging 7.4 percent, and Hong Kong’s Hang Seng fell more than 5 percent, to levels not seen since Sept. 11, 2001. And just as in the U.S., investors in the rest of the world took little comfort from this week’s emergency three-quarter-point rate cut by the Federal Reserve or President Bush’s stimulus plan. By any measure, then, developing economies are “far from immune” to what happens in the U.S. “In fact, as globalization accelerates, they may in some ways be more vulnerable than before.”

Any way you cut it, investors have a big new reason to be worried, said Joanna Slater and Antonio Regalado in The Wall Street Journal. “To escape woes in the U.S., investors have piled into shares in such fast-growing economies as China, India, and Brazil. Now it looks as if these markets might not offer a hoped-for refuge.” Trade breeds interdependence, and trade between the Asian economies and the U.S. has accelerated since the last U.S. recession, in 2001–02. Exports accounted for 45 percent of Asia’s total output in 2002; by 2005, that total was up to 55 percent. Still, because of the global trade boom, “emerging markets in general are on far sounder financial footing,” boosting their ability “to weather weakness in the U.S. economy.”

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