When America Sneezes... the World Still Catches a Cold!

CHICAGO, March 26, 2008 — "Investors and policymakers around the world have been watching the latest news about the faltering U.S. economy and the volatility in financial markets. Hopes that the rest of the world has somehow "decoupled" from the U.S., and can grow on its own, are becoming dimmer by the day," says Adolfo Laurenti, senior economist of Mesirow Financial, in his March issue of Themes on the Global Markets.

"We are already seeing signs of stress across Europe and Asia, which will eventually put a damper on export growth—a major driver of expansion in the U.S. today," notes Laurenti.

In his March newsletter, Laurenti takes a closer look at reasons to be skeptical of decoupling theories, the outlook for growth across the European Union, United Kingdom, Japan and China, and why the world is still more dependent on us than we are on them.

• Decoupling Theory, R.I.P. Economic growth abroad remained too dependent on exports and not driven enough by the self-feeding mechanisms of domestic demand in order to keep going without the U.S. We did not have to wait long to test that assumption: preliminary reports show an abrupt deceleration in world-wide growth during the fourth quarter, in-synch with the slowdown that we witnessed in the U.S.
• Inflation in the Euro-zone is accelerating—topping 3.3% in February—and is already considered too high by central bankers in Europe. Moreover, wage pressures are a concern in Europe as labor negotiations in Germany remain on a rocky course.
• Growth in the U.K. is expected to slow to 1.9% in 2008. Moreover, the greater risk is that growth will surprise on the downside. Indeed, it may be time for the British pound to reverse course and depreciate, after years of steady appreciation. To some extent, it already has.
• Japan continues to struggle, with its economy expanding only 2.1% in 2007. This year doesn't look any better due to 1) the rapid appreciation of the yen against the dollar taking a toll on exports, 2) policymakers' inability to stem the dollar's free fall (yen's ascent) and 3) the persistent political gridlock, which has postponed the appointment of a new head to the Bank of Japan. Japan is expected to grow at an anemic 1.3% rate in 2008.
• Economic conditions in China are likely to remain fairly strong with the economy rising at 9.8%, which is less than the double-digit pace of 2007, but is still strong. It still uncertain how China will adjust to the global slowdown, especially given their dependence on exports.

"The world is still largely running on one cylinder—the U.S. economy—despite its efforts to decouple from the U.S. in recent years. This means that exports can help, but can't save, the U.S. economy from its own missteps. Indeed, the bulk of strength in the U.S. during the second half of the year is expected to come from the increased spending and investment associated with fiscal and monetary stimulus, not improving trade," concluded Laurenti.

The March issue of Themes on the Global Markets as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with $31.4 billion in assets under management and more than 1,100 employees in 30 locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals and was named one of Chicago's Best Places to Work by Crain's Chicago Business in 2008. For the fiscal year ended March 31, 2007, the firm posted $451 million in revenue, with more than $238 million in capital. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

For more information, contact: Adolfo Laurenti, Mesirow Financial, 312-595-7129.

 

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