More evidence for “recouping”

I just read IMF paper “Spillovers Across NAFTA” which has been released last week. Let me quote a part of the summary:

“This paper examines linkages across North America by estimating the size of spillovers from the major regions of the world—the United States, euro area, Japan, and the rest of the world—to Canada and Mexico, For Canada, a one percent shock to U.S. real GDP shifts Canadian real GDP by some ¾ of a percentage point in the same direction— with financial spillovers more important than trade in recent decades….After 1996, the response of Mexican GDP is 1½ times the size of the U.S. shock—“when the U.S. sneezes, Mexico catches a cold”. These spillovers are transmitted through both trade and financial channels.”

Basically this paper brings a another evidence that higher levels of globalization have brought about increased synchronization of business cycles across countries and rising sensitivity to external shocks.

It also raises question how long CAD and MXN will remain resilient to US slowdown. In 2007 CAD was best performing G10 currency which may be explained by 1) strong domestic demand 2) high commodity prices. Now amid weaker growth in the US domestic demand is unlikely to fully compensate for the negative contribution to growth coming from net exports. Also terms-of-trade gains enjoyed by Canada over 2007 are likely to be reduced this year as weaker in US and the likely spillover to the world economy will likely mean lower commodity prices.

Another recouping story I found in EIU. EIU is getting skeptical on Asia decoupling from US slowdown. A quote:“Asian exports still predominately go to G3 marketsThere is, however, a caveat. Although Asia is certainly in a better position to withstand a US slowdown than it was in 2001, it would be a mistake to assume that the region has fully decoupled from the US. Although the Asia 8 have diversified their export markets over the past two decades, the G3 (and the US in particular) remains important in terms of final demand for Asian exports. According to calculations from the ADB, 70% of trade within the Asia 8 (excluding Taiwan but including China) consists of intermediate goods used in manufacturing production processes. This is mostly a reflection of changes in Asia's supply chains that have led to different production stages being parcelled out between different countries. In particular, China's export juggernaut now imports components from the rest of Asia and assembles them, before shipping them off to their final destination--which is usually still in the G3. As a result, in 2005 around 61% of Asian exports were still consumed in G3 countries.The argument that China can provide a back-up source of demand if the US falters is especially fragile. Soaring Asian exports to China do mean that China is now the largest Asian recipient of imports from the region (excluding Japan). However, most of this is the component trade. According to the ADB's calculations, China still only accounts for just 6.4% of total Asian final demand. This is under one-half of the contribution from Japan, and less than one-quarter of the contribution from the US. This clearly suggests that China's booming economy would be unlikely to prove much of a back-up if the US economy were to falter significantly.Indeed, by some measures, Asia's dependence on exports has actually increased since 2001, arguably making it more exposed to a slowdown in foreign demand. The exports/GDP ratio (measured in US dollars) increased for most Asia 8 economies between 2001 and 2006 (Indonesia and the Philippines being the two exceptions). The combined exports/GDP ratio for all eight economies increased from 57% in 2001 to 66% in 2006. Since the region as a whole is more export-exposed than in 2001, and with a large proportion of these exports still going to the US and other G3 economies, it could be argued that the Asia 8 are even more vulnerable than in 2001 to a slowdown in their main end-markets.”