If 2007 was a year of ructions in financial markets, for the real economy it was one of real progress. True, there were huge pressures on the world economy from rising energy and food prices, from the decline in the dollar and, within much of the developed world, growing indebtedness; and it was true, too, that it saw rising concerns about inequality and the environment. Yet for the world as a whole, 2007 saw growth at around 5 per cent, with rising living standards in almost every country, rich or poor. We don't have final figures yet, but according to estimates from the International Monetary Fund, 2007 looks like being one of the best years in terms of growth and living standards of any for the past quarter-century.
Much of this growth was driven by China. For the first time since the early 1800s, the Chinese economy added more economic demand than either the US or Europe, a performance that seems likely to be repeated in 2008 and beyond. The Chinese economy will, in all probability, overtake Germany's in 2008 to become the world's third largest, after those of the United States and Japan. With growth at 11.5 per cent, the problem for the Chinese authorities is not how to boost growth, but rather how to hold it back.
India, the other great emerging giant, has had another successful year, with growth of around 9 per cent after two years of similar performance. Though it is remains a smaller economy, this year India had added more demand to the world economy than the UK.
For the US, 2007 was the year when expectations were gradually shaded down. House prices started falling towards the end of 2006, which led not only to the sub-prime lending collapse but also to a slackening of consumer demand. For the first half of the year things seemed to canter on just fine, but there are signs that in the final three months, growth has slackened sharply. One issue for 2008 will be whether interest-rate cuts can revive the economy ahead of the presidential election. Another is whether those cuts might further undermine the already weak dollar, another problem for 2008.
Similar considerations apply to the UK, though with a time-lag. Our own housing market tipped down in the final few months and growth for most of the year has been strong at around 3 per cent. The puzzle for Britain has been why, despite this good growth, public finances have deteriorated so seriously. The new Chancellor, Alistair Darling, warned in October that public borrowing was forecast to rise to 38bn this financial year, around 3 per cent of GDP, but already that seems likely to be exceeded. If the UK had a better year than the US, which it did, it too has challenges ahead.
The economic patterns in continental Europe varied from country to country. In Germany, exports were the driving force. It is the world's largest goods exporter and its companies managed to sustain that performance despite the strength of the euro. Across the rest of the Continent, performance was more mixed, with particular problems in Italy (slow growth) and Spain (falling house prices and construction activity). But the euro zone as a whole has managed 2.5 per cent growth, less than the UK but a much better performance than it has achieved for most of this century.
The most vibrant part of Europe, though, has once again been in the East. The Baltic states grew at between 8 per cent to, in Latvia, an astounding 10.5 per cent, making that country the fastest-growing member of the EU. Poland reached about 6.5 per cent, the Slovak Republic nearly 9 per cent. Russia also grew at around 7 per cent, but all these "emerging Europe" countries grew strongly despite not having the boost that Russia derived from its oil and natural gas resources.
Elsewhere in the world, the Middle East naturally boomed on the back of a near-doubling of the oil price. Higher prices for energy and other natural resources also helped countries such as Canada, Australia and South Africa. One of the more encouraging aspects of the resource boom is that it helped sub-Saharan Africa grow at around 6 per cent, the best performance for a generation. The IMF projects further progress for 2008 and beyond.
As we move into 2008, there are inevitable shadows. Some parts of the world did not achieve as much in the past year as their countrymen might have hoped. For example, Mexico has had a tough time coping with higher food prices, something that is increasing inequality in many parts of the world. Rising food prices have pushed up inflation everywhere but, sadly, poorer people are most affected. If, as seems inevitable, pressure on the environment continues to rise, this will tend to increase inequalities still further. Other shadows include the impact a slowdown in the US, maybe a recession, will have on the rest of the world. But the fact remains that 2007 has, for the majority of people in the majority of countries, been a year of solid progress whatever the financial markets might make of it all.Reuse content