If the US Sneezes...

- "Although our forecast for US growth has been more downbeat than the consensus for a long time—and remains so—our view on the rest of the world continues to be more optimistic. This kind of forecast appears to be in conflict with the popular notion that ‘if the US sneezes, the whole world catches a cold’. Nevertheless, we argue that it is plausible. All else equal, a significant US slowdown would slow growth to a degree in the rest of the world, and in some places more than others. But  espite the conventional wisdom, export channels are too small to transmit a US slowdown to a comparable degree. And while transmission through financial channels is arguably more capable of spreading a US slowdown, there are few signs currently of the kinds of pressures on financial conditions or stresses that would signal such an impact."
- "As a result, we continue to expect further divergence in growth and policy between the US and many others relative to what the market is pricing. And we have been recommending trades around that theme in recent months, particularly with respect to the emerging economies and the smaller G10. In particular, this gives us a bias towards widening rate differentials between the US and many others, further broad USD weakness and a preference for EM exposures in equities, both at the index level and within the major markets."
- "As our analysis here suggests, the principal risk is that a global shock acts to ‘connect’ the various economies more than we expect—either through financial markets, the banking system or some other new event. That is not what we expect, but it is this possibility, and not the fact of a US slowdown itself, that we think needs to be monitored."

GoldmanSachs Global Economics Weekly 20100922

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