In the early days of the 2008 crisis, the idea of decoupling between emerging markets and the developed world was in vogue. It turned out to be no more than wishful thinking.
The collapse of Lehman Brothers precipitated a downturn that hit emerging markets harder than the developed world and the idea was forgotten in the stampede for the exit doors. The Bovespa index halved and Brazil went into recession, albeit one that proved short-lived.
Could it be different this time round?
The decoupling argument today is certainly back in vogue. But at first blush, it seems counter-intuitive. Brazil has not been immune from evens in the US and Europe. There are clear signs of deceleration in the economy with announcements of drops in investments and household consumption. The Bovespa has performed poorly.
But things are not nearly as critical for Brazil as they were in 2008. Although GDP is slowing, it will be positive at 3% or more this year. Crucially, the increase in trade between developing countries and the importance of China has changed the game. Brazil exported just over $5bn to China in 2005 compared to just $30 billion last year. That means China and Asia will play a far more important role in deciding Brazil’s future. The government is pushing interest rate cuts, for which there is plenty of scope. Meanwhile, the Brazilian banking system has not slashed credit as it did in 2008.
These dynamics could be thrown off course if the European banking system goes into meltdown. But there’s increasing confidence among businessmen that by embracing Asia and loosening monetary policy escape the worst of the effects stemming from the developed world.
Decoupling is an idea that has come of age.