Monday, January 16, 2012

2012 Preview: Coupling and Economic Growth

Happy New Year for 2012 to all my blog readers.  Having just returned from spending the festive season in South Africa (St. Francis Bay and Cape Town to be exact), with a stop in Dubai on the way out, I wanted to reflect on the global economy and its prospects in 2012.

While on the plane, I was reading the Xmas/NY edition of The Economist, and it struck me that the notion of "coupling" and "decoupling" has really not gone away, but at the same time has not been properly explored in academic circles in economics.  And whether we like it or not, when we talk about prospects for different parts of the globe it is all within the context of some kind of international business cycle, which is mostly determined by what goes on in the US.  So as I am doing more research which looks at economic cycles right now, I have also been interested in trying to characterize how different the US cycle is from cycles elsewhere, not in terms of the size of it's ups and downs ( - it's amplitude to a physicist) but more in terms of its shape, compared to other economies.  The first place though to start should be within the US itself though and here the dynamic graphic above comes into play.  This is an Oldham coupling mechanism (taken from this Wikipedia page) where the cycles are clearly not in sync and amplitudes are quite well, but all three wheels have the same cycle periodicity.  This is something like what we see in economics, except of course that there isn't the regularity that we see here because economies are not "pinned" together like these wheels are.  Nevertheless, the fact that there is cycle dependency is what interests me in terms of my research and this is one of the research themes I will be exploring in more detail this year.

If this type of coupling is one of the processes that is at work then it (partially?) explains why certain economies (like India's and China's) have much more growth volatility than does the US and other developed economies. Given that you accept the idea of a loose international synchronization of growth rates, then the good news is that 2012 will likely be markedly better for economic growth than most of the pundits expect - and I think we're already seeing that in the US employment numbers released in the first week of the year.

So what does this mean in terms of finance and investment?  Apart from following the general advice about keeping quite a lot of funds in US stocks and avoiding European stocks given the problems with implementing the austerity measures in the euro area, the Standard and Poor's downgrades, together with the cuts to public expenditure in the UK, there seems to be little consensus on what else to do with your money in 2012.

So where else is promising? I think Africa has still a lot of unfilled potential, and particularly those corporations based in South Africa or US corporations or European corporations that operate in Africa.  Parts of East Asia, in my view, are also still interesting - India, Malaysia, Indonesia and Taiwan in particular, but China is worrying, given the large property bubble that still exists there.  South America also still has potential, but is largely dependent on central banks being able to restrain inflation while ensuring growth.

But my main point in this posting is that prospects everywhere are extremely dependent on the international business cycle, which in turn is determined largely by what happens in the US and Europe.  While the US increasingly looks to be doing better, Europe still has large clouds hanging over its prospects in 2012.

Featured Post

Free Trade on Trial - What are the Lessons for Economists?

This election season in the US there has been an extraordinary and disturbing trend at work: vilifying free trade as a "job kille...

Popular Posts

Search This Blog