Wednesday, September 10, 2008

De-Coupling Bites the Dust

Over the last few years we've seen some great rationalizations and spin regarding the economy. Some of the more classic are the following:

-- "If you take out the financial sector everything is fine"

-- Housing has hit bottom

-- Because 95% of people are paying their mortgages on time, everything is OK

-- The world will decouple; meaning the US can slow down and not effect anybody else.

All of these lines of thought (using a very liberal definition of the word "thought") have fallen by the wayside. Today there is further evidence that "de-coupling" is, well, dead:

The European Union Wednesday slashed its economic growth forecast for 2008 and said several major European economies will slip into recession.

The European Commission, the EU's executive arm, said in its quarterly forecast that the sustained rise in commodities prices, financial market turmoil and a weaker global economy are taking a toll on the bloc's economy.

It predicted Germany will enter a recession in the second and third quarters of the year, and that the U.K. and Spain will suffer a similar fate in the third and fourth quarters.

Overall, the commission expects the European economy to grow 1.4% in 2008, down from the 2% growth it predicted in April. For the fifteen countries that use the euro, the commission cut its 2008 economic growth forecast to 1.3% from 1.7%. The commission said it will probably cut its 2009 forecasts in November due to weakness throughout the global economy.

Considering exports have been one of the few bright spots in the US GDP reports, this is not good news.