A couple of years ago when the markets were sky rocketing one theory that was doing rounds frequently were the De-coupling theory. Believers of the theory argued that the Emerging Economies including the BRIC (Brazil, Russia, India, and China) nations were beginning to decouple from the Developed world. The argument put forward by them was that the emerging economies were in a different lane of growth driven by local consumption and Inclusive growth. The theory was doing fine until the subprime bubble burst in the US and their economy began to falter.
In 2008 Major economies like US, UK, France, Japan & Germany saw a nose dive in their growth rate as a consequence of Subprime bubble that burst in the US. During the course of the crisis the credit markets froze due to large scale bankruptcies of some investments banks and panic began to spread across the world markets resulting in a big plunge only to prove a point that the world economies were more intertwined than ever before with the troubled banks having their wings spread in investments across the globe. It was the markets of the Emerging economies that took a bigger hit than of developed ones. Brazil and Russia are more of commodity driven markets. As the recession became severe and demand for consumption began to fall, Russian markets took a big knock losing 70% of its value. China and India saw a significant slowdown in their growth rates and huge outflows of investments. After this chaos in 2008 the Decoupling theory was shelved and no one really talked about it thereafter.
Performance of Stock markets in 2008
United States -38%
Japan -42%
France -42%
India -52%
China -65%
Russia -72%
Now after nearly 16 months since the recession began in the US and when there are some signs of a turnaround in the economy the arguments of Decoupling theory is making a comeback. As the Credit markets have eased and the Stimulus packages are showing effects, In the first 3-4 months of 2009 emerging economies like china have began to show some signs of revival of growth, although it would be a bit too optimistic to call it a complete turnaround. The developed world even in optimistic estimates will take a few more quarters to get back to growing ways, however the emerging economies like India & china could stabilize and recover much sooner given that the governments & central banks take proactive measures in the wake any further significant negative macro factors or any big scale bankruptcies of institutions in US or Europe.
From India’s perspective the formation of UPA lead government turned out to be a huge positive, the markets rejoiced with a massive rally. The Government now has an opportunity to hasten the long standing economic reforms which could put India back to its rapid growth trajectory. For now the idea of decoupling theory will live on, however it cannot be concluded that the current uptick in the emerging economies could be sustained forever given the fact how fluid times are. It’s yet to be seen if the recent positive data points or the “Green shoots” are indeed real recovery and not false signals or “weeds” that appear often during prolonged periods of severe recessions.
Sathya Prakash
In 2008 Major economies like US, UK, France, Japan & Germany saw a nose dive in their growth rate as a consequence of Subprime bubble that burst in the US. During the course of the crisis the credit markets froze due to large scale bankruptcies of some investments banks and panic began to spread across the world markets resulting in a big plunge only to prove a point that the world economies were more intertwined than ever before with the troubled banks having their wings spread in investments across the globe. It was the markets of the Emerging economies that took a bigger hit than of developed ones. Brazil and Russia are more of commodity driven markets. As the recession became severe and demand for consumption began to fall, Russian markets took a big knock losing 70% of its value. China and India saw a significant slowdown in their growth rates and huge outflows of investments. After this chaos in 2008 the Decoupling theory was shelved and no one really talked about it thereafter.
Performance of Stock markets in 2008
United States -38%
Japan -42%
France -42%
India -52%
China -65%
Russia -72%
Now after nearly 16 months since the recession began in the US and when there are some signs of a turnaround in the economy the arguments of Decoupling theory is making a comeback. As the Credit markets have eased and the Stimulus packages are showing effects, In the first 3-4 months of 2009 emerging economies like china have began to show some signs of revival of growth, although it would be a bit too optimistic to call it a complete turnaround. The developed world even in optimistic estimates will take a few more quarters to get back to growing ways, however the emerging economies like India & china could stabilize and recover much sooner given that the governments & central banks take proactive measures in the wake any further significant negative macro factors or any big scale bankruptcies of institutions in US or Europe.
From India’s perspective the formation of UPA lead government turned out to be a huge positive, the markets rejoiced with a massive rally. The Government now has an opportunity to hasten the long standing economic reforms which could put India back to its rapid growth trajectory. For now the idea of decoupling theory will live on, however it cannot be concluded that the current uptick in the emerging economies could be sustained forever given the fact how fluid times are. It’s yet to be seen if the recent positive data points or the “Green shoots” are indeed real recovery and not false signals or “weeds” that appear often during prolonged periods of severe recessions.
Sathya Prakash
