The Global Question: Who Needs the U.S.?

By Peter Gumbel

Why is Nicole Leibinger-Kammueller still smiling? The chief executive of Trumpf, a family-owned machine-tool firm in Germany, has watched orders from the critical U.S. market slow significantly in the past few months. But while the housing-bled U.S. economy has been sluggish, and the dollar weak, it's all proving quite manageable. "We can feel the U.S. slowdown, but it's not unsettling. There's no crash," Leibinger-Kammueller says. Trumpf's sales of its metal-cutting machines elsewhere--to Saudi Arabia, to Singapore and especially in Germany--continue to rack up double-digit growth rates. The buoyancy of global trade "is amazing. We have to keep telling ourselves: Careful, this can't last," she says.

Economists and policymakers who will be attending the World Economic Forum in Davos, Switzerland, beginning Jan. 24 have been furiously debating whether the world has "decoupled" from the U.S. economy. The U.S. constitutes about 28% of global gross domestic product (GDP) as measured in dollars, and it accounted for one-fifth of worldwide growth from 2000 to 2006. When the U.S. faltered in the past, the rest of the world staggered. And certainly there are signs of fatigue. A cooling housing market slowed U.S. GDP growth to 2% in the third quarter, and even if the economy has strengthened a bit since, as many economists believe, its growth is still way below the blistering 5.6% rate of the first three months of 2006. Jim O'Neill, London-based head of global economic research for Goldman Sachs, says that even if the U.S. economy remains soft for much of the year, "we're pretty confident that the rest of the world will withstand it." So far at least, businesses ranging from Hong Kong electronics makers to German machine-tool producers are riding out a period of U.S. weakness. At the German Engineering Federation in Frankfurt, chief economist Ralph Wiechers concurs. "It used to be that the U.S. economy supported the world economy," he says. "Now it's the other way around."

The old industrialized-world triad of the U.S., Japan and Western Europe no longer dominates to the degree it once did. China is close to snatching the No. 3 slot on the list of world's biggest economies away from Germany, and India and South Korea are set to join the top 10 within a decade. India's GDP has expanded by $350 billion in the past six years--equal to the entire economy of the Netherlands in 2000. Once moribund countries such as Argentina and Russia are doing much of the heavy lifting today. According to the World Bank, developing nations collectively grew about 7% last year--more than twice as fast as high-income countries. They now account for 49% of world economic output, up from 39% in 1990.

Still, even the biggest optimists concede that nobody would escape unscathed if the U.S. economy were to hit a wall. Its big local trading partners, Mexico and Canada, would probably be hurt the most, but the reverberations would be felt worldwide. The key bone of contention is the extent of the suffering.

Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. For example, while China's imports are way up, those gains are due less to a free-spending middle class than to increasing demand for raw materials and components to feed the country's manufacturing sector, which turns the material into finished products to ship to the U.S. "If you just look at the numbers, it looks like Asia's exports to China are larger than they are to the U.S.," says Rob Subbaraman, senior Asia economist for Lehman Brothers in Hong Kong. "But people aren't taking into account where the end demand is coming from." Stephen Roach, Morgan Stanley's chief economist and one of the most skeptical observers of this world economic scene, has long warned about the dangers of flagging U.S. demand. Now he's concerned too about signs he sees of a possible Chinese slowdown--one reason why he thinks global growth this year will be "significantly below what most are expecting."

So will it be a "happy slowdown," as Goldman's O'Neill predicts, or a meltdown? You can have your own debate; in the meantime, here are some of the key issues:

THE U.S.: GO YANKEES What economists are struggling to predict is how pervasive the impact of this housing slowdown will be on the rest of the U.S. economy, and abroad. Perhaps most surprising, American consumers are continuing to spend, regardless: automobile purchases are sluggish, but retail sales rose by a higher-than-forecast 0.9% in December. "I'm not prepared to bet against the American consumer. That's a highly dangerous proposition," says Jesper Koll, chief Japan economist for Merrill Lynch.

Jean-Philippe Cotis, chief economist at the Paris-based Organization for Economic Cooperation and Development, says the critical question is whether the U.S.'s housing woes are an isolated problem or a signal that the entire U.S. economy is overextended. "For the moment it looks like there is only marginal overheating," he says.

ASIA: SPENDERS WANTED Purchases by Asia's rising middle class have made the region far less dependent on exports to the U.S. to power the economy. Today only 16.5% of Asia's exports are sold in the U.S., down from 25.5% in 1993. Yet there are significant regional differences. Jonathan Anderson, chief economist for Asia at Swiss bank UBS, says Singapore, Malaysia and Japan remain more vulnerable if tapped-out Americans start to shop less, given that their own domestic spending is relatively weak; by contrast, China's consumption is rising steadily.

EUROPE: HOLD ON It's the euro that has so far borne the brunt of the dollar's decline: it rose about 10% last year against the greenback. A stronger currency makes European exports more expensive for foreign buyers. But that hasn't prevented Germany from notching up its biggest trade surplus since the fall of the Berlin Wall 16 years ago. The good news is that buoyant exports have boosted business confidence in Europe's biggest economy and led to an unexpectedly strong increase in domestic demand. German companies appear to be hiring again: in December the number of jobless fell by 100,000, the best improvement in years, although the overall unemployment number remains a very high 9.6% of the workforce.

Can Germany take the load off the U.S. and the rest of Europe? Growth in the 13 nations that have adopted the euro is expected to be 2.6% in 2006, unusually strong for the growth-challenged Continent, and in the past few months it has outpaced the U.S. for the first time in years. The European recovery is uneven, though, with Italy and France faring less well. Nevertheless, "Europe is going to have a great year," reckons Harvard professor Kenneth Rogoff, former chief economist at the International Monetary Fund.

Leibinger-Kammueller, the boss at Trumpf, certainly hopes so. Trumpf's continued strong sales growth is in large part the fruits of a geographical diversification: it established a subsidiary in the U.S. as long ago as 1969 and opened an office in Japan eight years later. It's currently investing in facilities in the Czech Republic, Mexico and South Korea. "Our main competition used to be in the U.S., but it has disappeared there, and now it's Japan," Leibinger-Kammueller says.

Still, Trumpf uses its U.S. operations as a springboard not just to the American market but also to Asia, where it exports part of its U.S. production. "Russia is going well, so are OPEC countries," she says. "But we also believe in the American economy." While the world tries to figure out just how critical the U.S. is, keeping your eggs in a lot of different baskets may be the best strategy.

With reporting by Hannah Beech / Bangkok, Adam Graham-Silverman / New York, Bill Powell / Shanghai, Andrew Purvis / Berlin, Peter Ritter / Hong Kong, Bryan Walsh / Tokyo, Adam Zagorin / Washington