There’s been some talk (again) lately that ‘decoupling’ is taking place – that is, emerging economies are growing or recovering despite the ongoing recession in the developed states. An article in today’s Financial Times shows what I mean. I am skeptical.

Lest you forget, decoupling was all the rage in 2007, when the Western world first experienced the credit crunch. But decoupling was subsequently dismissed when it became apparent that many if not most major emerging economies would suffer even more than the US – the epicenter of the credit crunch and global recession.

Before I go on, let me make a distinction between macroeconomic decoupling and financial market decoupling. I will address the macroeconomic side first.

Much of the decoupling debate – in fact much of any economic debate these days – centres on China. Given Asian economies’ high dependence on exports and the global trade cycle, I think the region can be used as a test bed for decoupling. During the good years leading up to 2007, the rising percentage of emerging Asian (and Japanese) exports to China was cited as proof of decoupling. But this seemingly failed to take into account that manufacturing had shifted to China – i.e., more Japanese, Korean and Taiwanese firms were exporting components to China, assembling them into finished goods there, and then re-exporting those goods to the US and European Union. Indeed, a study by the Asian Development Bank in 2007 suggested that rising intra-Asian trade was largely being driven by non-Asian final demand.

Subsequent GDP data releases bode very badly for the case of macroeconomic decoupling. Most Asian and European economies are set to decline by more than the 3.3% contraction Business Monitor International (BMI) forecasts for the US in 2009. China, India, and several Latin American, Middle Eastern and African economies will avoid recession or far outperform the US this year, but all will have slowed very sharply from their 2007-08 growth performances. As I have argued before, emerging economies cannot decouple from the West by coupling to China until China itself decouples from the West – which might be never. This explains why even the relatively isolated BLANK (Burma, Laos, Afghanistan and North Korea) economies are suffering.

While some emerging economies may already have started recovering and will emerge from recession/slowdown before the US, this is surely because of the very substantial fiscal packages that have been implemented. China is a case in point, having started to spend US$586bn on a fiscal stimulus unveiled last year.

But to me, growth based on super-high fiscal stimuli is not proof of decoupling. Throw enough money at anything and it will probably grow temporarily.

Staying on the macroeconomic front, I am more sympathetic to the argument that the 2008-10 ‘Great Recession’ may be an unfair test of decoupling, because nothing can be unscathed amid the worst global recession in 70 years. However, I also believe that the notion of decoupling does not make sense in a more globalised world.

For me, the key to a more sustainable decoupling (at least away from the US and Europe) ultimately lies with emerging market consumers, especially in China and India. In an ideal scenario, there would be perhaps four equally-sized consumer markets in the world. However, simple arithmetic suggests that such decoupling is a long time off. Private consumption makes up 70% of the USA’s US$14 trillion GDP, or US$10 trillion. However, private consumption is only 35% of China’s US$4.5 trillion GDP, or US$1.6 trillion. The figure for India is even less. True, private consumption may be increasing faster in emerging markets than the US, but I suspect that in absolute terms the US will stay ahead for years. Thus, China and several other major economies will need to do a lot more ‘rebalancing’ of their economies away from exports in favour of consumption. And this will take time.

Thus far, I have seen only two interesting cases of macroeconomic decoupling. The first is Bangladesh, whose government estimates real GDP growth of 5.9% in the fiscal year July 2008-June 2009 (i.e. the worst phase of the present recession) compared with 6.2% in the previous fiscal year. Its resilience would appear to stem from the fact that private consumption makes up 75% of GDP, but I fear that its economy is actually lagging the global cycle rather than decoupling from it. The second example is Japan during the ‘lost decade’. Its economy grew at a snail’s pace in the 1990s, despite very strong US growth. This was of course negative decoupling – although you could argue that Japan would have performed worse without a robust US economy.

Overall, a global crisis is a global crisis. Some countries are dealing with the shock better than others, but there is no real decoupling to be seen. Moreover, I’d say that economic decoupling is a feature of the recovery phase, not the crisis phase, which we are still very much in. Over time, Asian economies will begin to consume more of their own goods and the balance of power will shift from the West towards Asia. But it’s going to be a slow process, taking years if not decades. Anyone expecting the US consumer to stop dictating play any time soon is going to be very disappointed.

A better case can be made for decoupling when it comes to financial markets. As I mentioned recently, major emerging market stock indices have sharply outperformed the US this year. But then again, they also fell more steeply than the US last year, and we are currently seeing a macro-market disconnect.