Hamish McRae: Satnav is heading for the East but at least Britain should move up a gear

Economic View

Let's concentrate on the world, not just Europe for a moment – not withstanding all the fuss about downgrades.

It's going to be another year when the focus of the world economy shifts inexorably East, as we will become increasingly aware as the months go by. You may not have heard of the Chevrolet Sail or the Geely Emgrand but you will. The Emgrand will be the first Chinese car on the UK market later this year, while the Sail is the first General Motors car designed in China.

The Emgrand is interesting mostly because it is cheap: a stylish mid-sized saloon at the price of a small hatchback. The Sail is interesting because it is designed for the Chinese market rather than the European or US one. It has more roomy back seats, not because the Chinese have larger bottoms than Americans (the reverse must surely be true) but rather because Chinese people are more likely to have a driver and therefore spend more time in the back. But both exemplify a shift of power. China buys more cars than anyone else: 18.5 million cars and light vehicles last year, against 12.8 million in the US. Big markets call the shots.

That is one industry, albeit a hugely important one. If you are pondering the prospects for our own economy next year – and this week will see another bout of concern – you have to try to see what might happen here in its global context. It seems pretty certain Europe will go back into recession, for even Germany had a poor final three months and the situation in the rest of the eurozone becomes more troubling by the day. But the world economy will keep growing, albeit at a somewhat slower pace than last year.

The main graph looks at what has been happening to three indicators: industrial output, real money supply, and the OECD lead indicator. The first two are calculated by adding together what has been happening in the G7 to what has been happening in the E7. The G7 is a familiar concept, the seven largest advanced economies. The E7 is the term coined by PricewaterhouseCoopers for the seven largest emerging economies, led by China and India, and including Brazil, Russia, Indonesia, Mexico and Turkey. Add all 14 together and you account for more than 80 per cent of the world economy.

Typically you would expect money supply to lead output by about six months, while the OECD indicator would lead it by about three months. Simon Ward, an economist at the fund manager Henderson, notes: "The indicator was very weak last summer but moved back into positive territory in October and rose further in November, reaching its highest level since February. This suggests the late 2011 recovery in global industrial momentum will be sustained in early 2012."

That is more optimistic than the general tone of comment that we have been hearing of late but that is because he is focusing on the world outlook rather than domestic or European prospects. That is what we will all have to do. Look at the chart on the right. This comes from a new study by HSBC on the shape of the world economy in 2050. The projections indicate a slower rate of catch-up by the big emerging countries than other studies have suggested but the movement towards a more balanced world economy is inescapable.

This leads to more immediate question: to what extent does a world economy being pulled along by demand from the emerging countries help or hinder our own prospects? Obviously growth in export markets helps overall growth. One of the reasons why Germany has outperformed the rest of the eurozone this year has been the strength of its exports to China. It looks as though exports to China will pass those to the US (at present its largest market outside the EU) for the first time this year.

But, on the other hand, demand for energy and commodities pushes up import prices and the UK in particular has suffered from imported inflation. So some slight easing of the rate of inflation as a result of some slight shading down of growth in China and India would actually be very welcome. On balance, growing global demand is better for an open economy such as our own. But too fast a rate of growth in the emerging world creates as many problems as it solves, because of the increased demand for energy and raw materials and the impact on inflation.

So the next question is whether the world economic environment this year will be reasonably benign, given that the environment in the eurozone will be rather negative. It is difficult to give a confident answer because the signals are so mixed. But it is worth coming back to that leading indicator shown in the graph. The dip through the summer was quite worrying, reflected as it was by weak share prices and a fall-off in the rate of growth of industrial output. But the pick-up in money supply and the lead indicator since then must be saying something. Put it this way, looking at that graph, there is nothing like the sense of catastrophe these indicators signalled as we went into 2008.

So what does this mean for Britain? My own expectation is that we will have another six months of weak growth, with maybe a negative quarter. There is certainly a possibility of something worse and Ernst & Young's new economic forecast out tomorrow will suggest that the UK will go back into recession and unemployment will reach three million. But just as all the forecasters last year (including the Office for Budget Responsibility) were far too optimistic, it is at least possible that they are now overreacting to that past failure.

A more positive outlook would be to expect a year of two halves: six months of continued struggle, followed by six months of decent growth helped by inflation coming back within the target range. One thing is certain though. It will be a year when power continues to shift away from the developed world – however uncomfortable that may feel. If on the other hand this whole macro-economic junk bores you and all you want is a stylish saloon for £10,000, then come October Geely will be delighted to sell you one.

Rating agencies still have the potential to cause damage

So France, among others, has had its debt downgraded. One of the puzzles to anyone outside the world of finance is the hold that the rating agencies still appear to have over financial markets, notwithstanding their catastrophic failure in giving AAA ratings to junk US mortgage debt.

But now the agencies are following market movements more than leading them. So the downgrades should be seen more as a reflection of reality than ground-breaking new information.

But the downgrades did flip the markets. things were cantering along fine, with a growing consensus that the European Central Bank's flood of loans to the banks was easing Europe's money market pressure. Then suddenly the mood darkened. Oh dear.

Any kind of downgrade is embarrassing politically but does it really matter? It is possible this will have little long-term impact. But it underlines the fundamental weakness of European sovereign debt. The big question mark over the future of the eurozone grew a little bigger last Friday.

Start your day with The Independent, sign up for daily news emails
News
newsAnother week, another dress controversy on the internet
Life and Style
Scientist have developed a test which predicts whether you'll live for another ten years
health
Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
news... and what your reaction to the creatures above says about you
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn