A slowing US economy since the beginning of this year has raised a debate as to whether the rest of the world can decouple from the world's largest economy. A housing market downturn and the subsequent crisis in the subprime mortgages have depressed the forecasts for US GDP although most other areas, especially the BRIC economies, GCC countries and a large part of emerging Asia are anticipating robust growth. Under the circumstances, the article attempts to explore the possibility of decoupling in a situation of a short-term US slowdown as well as a more dismal situation of full blown recession.

In January 2007, economists began wondering whether it was possible to decouple the US economy from the rest of the world. If decoupling implies disconnecting or separating, then is it possible to envisage a world which grows independently of the US? It used to be said that if "the US sneezes, the rest of the world catches a cold." But perhaps it is no longer so. There is an increasing debate that the world can witness a reasonable growth trend despite a persistent slowdown in the US.

The US has been a critical driver of global growth till 2005. In 2005-06 and in the first two quarters of 2007, the US GDP growth has slowed down while the rest of the world was going strong. According to an International Monetary Fund (IMF) publication in July 2007, the global growth is projected at 5.2% in 2007 which is higher than projected in April 2007 by 0.3% points.

For the US, however, it is expected at 2% which is 0.2% lower than that projected in April 2007. It is expected to regain momentum by the second quarter of 2008. Growth projections for the Euro Area, especially Germany, and for Japan have also increased. Spillovers from the US economy can affect the other economies as well and hence the debate as to whether the effect of the US slowdown can be benign on the rest of the world. According to an IMF paper published in April 2007, a 1% point reduction in annual US growth is associated with a 0.2% growth decline in Latin America and 0.4% or more in Mexico and Canada.

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