_edited.png)
©Risk Concern. All Rights Reserved.
In recent years, one can reasonably state that the overall strength of the U.S. economy hasn't improved.
Due to the emergence of new risks and increase in concerns regarding internal and external risk vectors, many businesses, investors, analysts, etc., whose national economy may be perceived as highly affected by the American economy, may have heightened concerns due to this condition.
For example, Canadians may be concerned that an economic recession down south may severely impact their economy, which may then cause, a precipitous decline in the housing, equity, and job markets, to name a few. The Brits, Aussies, and Singaporeans may have similar concerns. These countries' economies have strong interwoven connections with the American economy, and thus, these concerns are valid.
This work evaluates how an economic recession or downturn in the USA may impact the economy of Australia, Canada, Singapore, and the U.K., and quantifies, using a data-driven approach, the decline that the economies of the aforementioned countries can expect if a recession/economic crash etc., occurs in the U.S. The results of the numerical analysis are explained in simple terms.
Methodology
Primarily, correlation and regression analyses are utilized to conduct this analysis. Confidence intervals, growth rates, and volatility have also been calculated. Don't worry, the findings are explained in plain English.
Results of GDP related calculations of countries assessed, in relation to the economy of USA:
An important factor for this analysis is the average expected decline in the U.S. economy and a high confidence range for this figure: In the USA, since 1947, the mean real decline in GDP, per quarter in a recession, stands at -0.95%; as per a 98% confidence range & time-series analyzed, the overall decline in the next recessionary period should be within the range of -1.5% to -0.43%.
However, as per the application of VaR methodology, decline, as per a 99% level of confidence, can be as much as -4.2%. This method applied to the analysis below is as per the 99% level of confidence.
Below, the results of the calculations & what these results mean for each economy in this analysis have been discussed:
United Kingdom
The British economy has a high covariance (beta) of 1.6 with the U.S. economy. The correlation between the two stands at 0.83. This simply means that a -1% real decline (inflation-adjusted) in the American GDP is expected to cause a -1.6% decline in the British economy.
As per our above-calculated confidence range, we should expect the U.K. economy to decline in the range of -2.4% to -0.7% in the next American recession. As per the VaR value, nonetheless, decline can be up to -6.7%.
The correlation between the two economies is also high, i.e., the improvement or decline in one produces similar results in the other. The United States is also the second-biggest trading partner of the U.K., the first being the E.U.; however, it is the single largest country as a trading partner of the U.K.
The Services, Financial, and consumer products sectors have emerged to become the most dominant in recent decades in Britain, while we haven't seen the emergence of a major technological sector that may be classified as likely to become dominant.
If this trend persists, we aren't likely to see substantial upward momentum in overall British productivity in the long run, and thus, arguably, the overall risk of contagion from other international economies is likely to increase.
The worst decline in British real GDP in the last 3+ decades stands at -19.5%.
Singapore
The economy of Singapore has a covariance (beta) of 1.081 with the U.S. GDP. The correlation between the two stands at 0.58. This means that a decline of -1% in the real GDP of the U.S. is projected to cause a decline of -1.081 in the real GDP of Singapore.
As per our numerical analysis, as the next expected decline in the GDP of America is likely to be in the range of -1.5% to -0.43%, as per the covariance value calculated, the next economic decline in the USA can contract Singaporean GDP in the range of -1.622% to -0.465% (confidence level: 98%).
As per the VaR calculation, nevertheless, decline can be as much as -4.54%.
The correlation between the two is substantial, however, it isn't very high. Over time, due to the further strengthening of regional Asian countries such as India, Vietnam, Cambodia, etc., the sensitivity of Singapore's economy to the U.S. economy should further reduce.
Singapore's biggest trading partner is China. The worst decline in Singapore's real GDP for the last 3+ decades (since 1987) stands at -13.12%.
Canada
Canadian economy's covariance (beta) with the U.S. economy, as per the regression analysis, stands at 0.97. In simpler terms, this means that a -1% decline in the real GDP of the USA is anticipated to result in a -0.97% decline in the real GDP of Canada.
As the next decline in the America GDP (real) is expected to be in the range of -1.5% to -0.43%, we can confidently state that the next decline in the GDP (real) of the USA is expected to cause a decline in the range of -1.455% to -0.42% (98% confidence level).
Decline, however, can be as much as -4.1% as per VaR methodology.
The two economies, of course, are deeply interlinked, and one can soundly argue that the Canadian economy has high dependence/reliance on the economy of the USA, and the two are deeply interconnected; America is also Canada's largest trading partner. The correlation between the two, as one would expect, is also considerable, standing at 0.74; however, not as high as the British correlation figure discussed earlier.
The level of covariance and correlation between the two economies is likely to remain high in the future, as the intertwined nature of the two isn't likely to change. Suffice to say that those wondering whether the economy down south can considerably impact their business, house prices, etc., should know that the answer is yes, it can.
The worst quarterly economic decline in Canada (in real terms) in the last 3+ decades stands at -11.3%.
See also: 1. how much can house/apartment prices rise of fall in different Canadian provinces. 2. How much do house prices crash in an economic recession in Canada.
Australia
The covariance (beta) of Australian real GDP with the U.S. real GDP stands at 0.54. Put simply, a -1% decline in the American GDP (real) is expected to cause a decline of -0.54% in the Australian GDP.
As per our 98% confidence interval range calculated to identify the expected range of economic decline in the USA, which stands at -1.5% to -0.43%, we can confidently state that the next adverse economic period in America may decline the Australian economy in the range of -0.83% to -0.23%.
As per the VaR methodology, decline can be as much as -2.27%, however.
The correlation between the two stands a 0.674 which is meaningful but not as high as some other countries compared above. The Australian economy is a resilient one that hasn't experienced a considerable economic decline in the last 3+ decades. The biggest trading partner of Australia is China, and due to the further strengthening of other Asian emerging economies, Australian economy's sensitivity to the economy of the USA is likely to decline further.
Final remarks
The calculations conducted in this work use a confidence level (98% for the mean confidence interval & 99% for the VaR analysis), and the values reported are as per the data analyzed; nonetheless, with a 98% confidence level, there remains a 2% probability that declines would be beyond the ranges discussed above.
However, we can state that the values discussed in this work are data derived, and actual future values, as per the long-term historical data, are likely to remain within the ranges discussed in this report.