Asia’s emerging economies have seen increasing integration into the global economy over the past few decades. In the past 30 years, their share in global GDP growth more than doubled. This larger integration process has also served to strengthen mutual economic ties between emerging Asian countries. This regionalisation is reflected in, among other things, the increased shares of intraregional Asian trade and of regional portfolio investments. The increased role of emerging countries in the world economy and, especially, increased intraregional integration raises the question whether these countries would be able to decouple from an economic slowdown or recession in the industrialised countries.
Theoretically, increased integration may either word for or against such decoupling. On the one hand, increased trade integration will lead to, for instance, increased demand spillovers. This is because strong growth in one country will boost demand for goods in the other country as well. This promotes the correlation of business cycles between countries, which counteracts decoupling. On the other hand, more integration may also promote further specialisation of production, which could encourage decoupling. In that case, sector-specific shocks may affect one country (with high specialisation in that sector), but not the other country, which specialises in another sector. Financial integration may also work both for and against decoupling: while a high level of financial integration reinforces financial spillovers, it can also facilitate the transfer of resources across countries and hence increase the possibilities to absorb shocks. Eventually, the question as to how sensitive emerging countries are for a renewed recession in the industrialised world can only receive an empirical answer.
For an empirical analysis of the correlation between business cycles, we look at the ‘Euclidean distance’ of the output gaps, where an output gap measures the cyclical position of a country’s economy, and the Euclidean distance is the degree of dissimilarity of business cycles. Chart 1 shows the Euclidean distance between the output gaps of the USA and emerging Asia. If there were decoupling between the two, the Euclidean distance would increase, whereas a tapering towards zero would mean the business cycles between both regions tend towards synchronicity. This measure provides no indication for the decoupling between Asian emerging countries and the US business cycle. In fact, if one may speak of a trend, it would tend in the direction of closer synchronisation of business cycles.