The Global Question: Who Needs the U.S.?

Illustration for TIME by Jon Krause

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Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. For example, while China's imports are way up, those gains are due less to a free-spending middle class than to increasing demand for raw materials and components to feed the country's manufacturing sector, which turns the material into finished products to ship to the U.S. "If you just look at the numbers, it looks like Asia's exports to China are larger than they are to the U.S.," says Rob Subbaraman, senior Asia economist for Lehman Brothers in Hong Kong. "But people aren't taking into account where the end demand is coming from." Stephen Roach, Morgan Stanley's chief economist and one of the most skeptical observers of this world economic scene, has long warned about the dangers of flagging U.S. demand. Now he's concerned too about signs he sees of a possible Chinese slowdown--one reason why he thinks global growth this year will be "significantly below what most are expecting."

So will it be a "happy slowdown," as Goldman's O'Neill predicts, or a meltdown? You can have your own debate; in the meantime, here are some of the key issues:

THE U.S.: GO YANKEES What economists are struggling to predict is how pervasive the impact of this housing slowdown will be on the rest of the U.S. economy, and abroad. Perhaps most surprising, American consumers are continuing to spend, regardless: automobile purchases are sluggish, but retail sales rose by a higher-than-forecast 0.9% in December. "I'm not prepared to bet against the American consumer. That's a highly dangerous proposition," says Jesper Koll, chief Japan economist for Merrill Lynch.

Jean-Philippe Cotis, chief economist at the Paris-based Organization for Economic Cooperation and Development, says the critical question is whether the U.S.'s housing woes are an isolated problem or a signal that the entire U.S. economy is overextended. "For the moment it looks like there is only marginal overheating," he says.

ASIA: SPENDERS WANTED Purchases by Asia's rising middle class have made the region far less dependent on exports to the U.S. to power the economy. Today only 16.5% of Asia's exports are sold in the U.S., down from 25.5% in 1993. Yet there are significant regional differences. Jonathan Anderson, chief economist for Asia at Swiss bank UBS, says Singapore, Malaysia and Japan remain more vulnerable if tapped-out Americans start to shop less, given that their own domestic spending is relatively weak; by contrast, China's consumption is rising steadily.

EUROPE: HOLD ON It's the euro that has so far borne the brunt of the dollar's decline: it rose about 10% last year against the greenback. A stronger currency makes European exports more expensive for foreign buyers. But that hasn't prevented Germany from notching up its biggest trade surplus since the fall of the Berlin Wall 16 years ago. The good news is that buoyant exports have boosted business confidence in Europe's biggest economy and led to an unexpectedly strong increase in domestic demand. German companies appear to be hiring again: in December the number of jobless fell by 100,000, the best improvement in years, although the overall unemployment number remains a very high 9.6% of the workforce.