With US equity markets hitting fresh all-time highs (as much of the rest of the world is 10-15% off its highs and falling), the meme that rules the “common knowledge” talking-head world is “US decoupling” or yet another version of ‘cleanest dirty shirt’. Well, as much as we hate to steal the jam from many an asset-gatherer’s donut, the BIS provides us with a simple quick efficient guide to show that no, not all…as the BIS finds the US business cycle is entirely co-dependent on Asian (and Emerging Market) economic cycles. Perhaps it is snowing everywhere in the world?
The co-movement of the US economy and Asia (DM and EM) has increased dramatically since the financial crisis…
Standard measures of real economic co-movement between Asia-Pacific economies and those elsewhere had been observed to follow a downward trend, leading some commentators to suggest that the region was decoupling.
However, this process reversed in response to the International Financial Crisis, and co-movement increased to historically high levels for some economies. We examine co-movement patterns and show that these are very sensitive to changes in macroeconomic volatility over time.
Controlling for this, however, co-movement is closely linked to underlying trade and financial integration. If international links continue to strengthen in future, co-movement will strengthen in tandem.
Decoupling is more a fiction than a fact or a forecast