It’s A Small World After All

In a similar vein, the global oil shock is not hitting the major oil-importing countries in the same way. Consumers everywhere are reeling under record oil prices. But the question is where the oil producers, who are almost drowning in petrodollars, are spending their new riches. Once again, the traditional export engines of the Western world, Japan and Germany, seem to benefit disproportionately from the demand for luxury cars and topnotch infrastructure equipment. Buoyant orders from the nouveau riche oil countries (as well as Eastern Europe and rising Asia) are one of the major reasons the export machines in Germany and Japan still keep humming, providing a basis for at least modest overall economic growth despite all the global headwinds.

Both Japan and Germany had reacted to a long period of economic underperformance in the past 10 to 15 years by making their economies somewhat more flexible. They still lag behind the United States and the United Kingdom on many counts. But these reforms still give them extra momentum for a while until they fully exploit their enhanced growth potential.

In the age of globalization, no country can fully decouple from its partners. If their currencies stay overvalued and surging oil prices depress the purchasing power of their own consumers, Germany and Japan will lose momentum as well. But for global investors, there is a lesson. Even in an integrated world, it pays to watch the domestic forces that shape countries and the companies in them.

Schmieding is chief European economist for the Bank of America.

© 2008