With a slowdown in the American economy and declining household spends in that country, the fate of the world economy (largely supposed to be dictated by the American behemoth) will depend on whether the emerging Asian economies can successfully de-link themselves from the American economy.

Some facts need to be cited here. Asia has contributed for over half the world’s growth since 2001, and it’s 21% contribution to the increase in world GDP exceeded America’s 19% (in dollar terms). Considering that in Asian countries, a dollar spent is worth a lot more than in the US, it would be more appropriate to compare consumer spending in terms of purchasing power parity than in terms of market exchange rates.

Critics argue that Asia’s growth is primarily export-led and that domestic demand in the Asian economies is very low. Thus, it is argued, any decrease in American demand would translate to a slowdown in the growth of the Asian economies.

Such generalisations about the Asian economies are perhaps unfair. For example, in China, India, Japan and Indonesia, while the domestic demand has grown more slowly than the GDP, the gap has been quite small. On the other hand, growth in Taiwan, Singapore and Hong Kong has clearly been export-led. It is argued that consumers in Asian countries are spending a larger portion of their incomes, either by borrowing or by eating into their savings. This would contradict the critics’ assumption that domestic demand in Asian economies is languishing.

While consumer spending in Asian countries is rising, so is capital expenditure. For example, Japanese manufacturers plan to increase capital spending by 17% until March ’07 to account for insufficient production capacities.

Further, considering that most Asian economies have small budget deficits (some even have marginal surpluses), they are in a position to tweak their fiscal policies to stimulate domestic demand. This could well offset an anticipated fall in exports caused due to a decline in American consumption.

It is also pertinent to note that America’s share of the total Asian exports have fallen from 25% to 20% in the last five years. A deepening of regional trade linkages could be a possible reason for this. It is estimated that a slowdown in American demand would not hurt India, China and Japan as much as it would Singapore, Hong Kong and Taiwan.

While it is undoubtedly true that the American economy is still considered to be a bellwether for the world economy and that significant fluctuations in American demand would hurt the world economies, a complete derailment of the Asian economies (in response to a downturn in demand by American consumers) is no longer anticipated. Improved domestic demand, better regional linkages and an overall “de-risking” (decoupling from the American economy) strategy are perhaps reasons for this. Despite this, the impact on tightly-linked global financial markets is unpredictable and a slowdown in the American economy would possibly result in a reduction in market liquidity, causing share prices to plummet in Asia as well as in the Americas.