Must world really catch a cold when America sneezes?


When America smokes, the rest of the world gets high. PHOTO | AFP

As stock markets around the world respond to turbulence in the US, variations on a dusty old theme are heard over and over in the media and elsewhere: "When America sneezes, the world catches a cold." “When America drinks too much, then everyone gets a hangover.” “When America smokes, the rest of the world gets high.”

To restate this catchphrase: the US economy which accounts for about a quarter of the world's gross domestic product, remains the world’s largest importer and the dollar is the leading reserve currency accounting for 60 percent of international foreign exchange reserves.

Therefore, a lost job leads to lower consumer spending fewer imports; weak business conditions lead to less investment in the equipment or supplies that are often produced elsewhere. High US rates lead to a stronger US dollar, which in turn fuels the “rush to safety” accelerating exit from emerging markets.

Recent comments on US interest rates by the head of the US Federal Reserve, Jerome Powell, brought this cliche back to the fore. And officials from Mexico to Africa are already on edge. To quote him, he said, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

To explain it simply, he believes that although inflation has fallen/stagnated since June (3.2 percent), the drop is not enough, as it’s still far from the desired two percent - rates are now between 5.25 percent and 5.5 percent. This is not a good signal. For countries such as Kenya, this is a weight added to our struggles with high debt and a prevailing economic contraction.

Presently, year to date, the NSE has shed over 30 percent (NASI), 26.3 percent (NSE 25) and 15.2 percent (NSE 20). Since January, the shilling has shed over 20 percent of its value.

Yields on our Eurobonds have shifted upwards by an average of 200 basis points since the start of the year. And for most countries, it's the same story. If it was US policy that pushed the world higher then, it is US policy that will pull the world under now as the country's troubled response to inflation emerges as a chief risk to any sustained global recovery.

Despite the ongoing Israel-Hamas conflict and performance of oil markets, the US economy and how it performs in 2023 is arguably determining the nature, depth and length of any recession in the rest of the world.

But what does this mean for investors? There will be difficult months and years ahead and it is of particular concern that Kenya is already weakened by other factors. This, in turn, can further exacerbate longer-term headwinds facing our growth which may further dampen already faltering investor confidence. In the end, the world’s current economic state demonstrates the fact that America’s sheer size makes it the bellwether of the global economy.

The writer is the MD Canaan Capital