Is the Slowdown Spreading? Ask Producers

(Peter G. Hall, Vice-President and Deputy Chief Economist, Export Development Canada)

Last year, decoupling was all the rage. Sure, the U.S. economy was going flat, but many asserted that the malaise was more or less confined within US borders. But what was loudly proclaimed mere weeks ago has now gone strangely silent. Is decoupling dead, or has it just gone dormant?

The debate centers around sequencing. Our increasingly synchronized, just-in-time world likely led many economy-watchers to expect a more simultaneous slowdown. And when the largest single economy began to falter in mid-2006 with no immediate external effects, hopes of a confined slowdown were kindled. The more optimistic pundits were even more hopeful, confining the slowdown to just one sector of the U.S. economy. But slowdown has spread to other parts of the U.S. economy, perhaps more gradually than expected, casting increasing doubt on decoupling.

Is the slowdown spreading internationally? Industrial production data give us a clue. In the U.S., industrial production has been roughly flat for 6 months. Not only is this further evidence of a generalized slowdown within the U.S., but it comes in spite of a weak-currency-inspired resurgence in exports. But as the U.S. malaise is already well-digested, this is not really a surprise.

What of other countries? First, the developed world. Eurozone production declined in three of the last four months, and between August and December 2007, year-over-year growth fell from 4.6% to just 1.3%. Deceleration is evident in Germany, where growth stalled late last year. Annual growth in France is a fraction of Germany’s, and recent monthly performance has been spotty. Output has been flat in the UK for seven months, while Spain and Italy have recently slid into deep decline. Industrial production in Japan is still growing, but the pace has diminished steadily, to about one-third of its late-2006 rate. This sounds like a lot more than a U.S.-only phenomenon.

The case is less clear in the rest of the world. Some economies appear to be immune to the slowdown. Production seems to be gaining momentum in Korea, Thailand and Taiwan, where annual increases rose through 2007 to a comfortable double-digit pace. But others are clearly sliding. Singapore, a bellwether economy for global trade, saw year-to-year industrial production plummet from the 15-20% growth pace to zero in the final half of last year. Things are worse in the Philippines, where declines persisted for most of 2007. India is down from double-digit growth a year ago, to the 7-8% range.

Other economies are somewhere in the middle. Brazil slowed in recent months, although growth is still decent. Malaysia’s production has improved consistently since early 2007, but sales aren’t keeping up: export growth has slowed rapidly, from 10% a year ago to just 3% last December. In China, the same trend may be developing. Production is growing steadily at over 17%. But exports to the U.S., up by a hefty pace in each of the last three years, are just 6% higher. China’s yearly exports to the EU look more respectable, but the trend in recent months has slowed.

The bottom line? The evidence is not complete, but what we do have makes a compelling case for a more staggered slowdown. Given the evidence, there is potentially a lot more slowing up ahead. These days, even the decouplers seem to agree.