Hamish McRae: America's future now depends on China

The key relationship is not between the US and Europe - it is now a much more complex balance

The dollar falls and stock markets take a tumble - with the unsurprising result that journalists start to predict that the end of the present burst of global prosperity is nigh.

Certainly anyone looking at London house prices, up apparently 6 per cent so far this year, can be forgiven for pondering just how long these rises can continue. Quite a lot of us too are concerned about our ability to pay our way in a world where we don't seem to make anything anymore - where, for example, car plants either shut, as in the case of Peugeot, or are scaled back, as with Vauxhall.

Of course, that is just the British version of a wider set of worries. Economists more generally are concerned about the extent to which the US relies on other, poorer, countries' savings to keep the American consumer a-buying. They are worried too about the drag on world growth from rising energy prices. And perhaps most of all, they are worried that interest rates will rise and that the rest of us, be we British mortgage payers or American credit-card addicts, won't be able to cope.

One of the fundamental features of the world economy is that there is always something to worry about if you feel so inclined. There is always something going wrong.Even successful, fast-growing, parts of the world suffer setbacks, witness the Asian financial market crisis of the late 1990s. That may now seem a distant memory but it was pretty miserable at the time. I remember being in Bangkok and looking at the "see-through" tower blocks - buildings where construction had been abandoned because the developers had gone bust, leaving just a steel skeleton.

Eventually Thailand recovered, as did the British economy after leaving the ERM, but the sad truth is that economic disruption distributes its pain both widely and indiscriminately. The British homeowner who cannot keep up the mortgage payments, the Thai construction worker who loses his job, the North African immigrant in France who can't get a job at all - lots of decent people suffer, often through no fault of their own.

The UK happens to be pretty self-confident about its economic progress at the moment, but we are right to be concerned about future trends. We know how to do failure: we have lots of experience of that.

The best way to make sense of all this is to try to place where we are now in a historical perspective. While the world economy has been hit by periodic shocks and while there is an identifiable business cycle, the fact remains that it has experienced the most successful half-century ever. Humankind has never seen such a rapid or widespread rise not just in its standard of living but also in other social measures such as health and education. That progress makes the plight of the excluded, particularly in sub-Saharan Africa, all the more poignant. But it is unprecedented progress nonetheless.

The growing economic wealth of what we still think of as the developing world, and particularly of India and China, should change the way we look at economic news. Our instinct is to look at the symbols of the old economic world to act as a bellwether for the world economy: to Wall Street, the dollar, other Western financial markets and so on. Naturally they remain very important. But these markets are shaped more and more by the new economic forces, rather than the old.

Take three specific examples. One is the price of oil. We feel that every day when we fill up, but the rise has been driven as much by increased demand from China as it has from anything that we in the West are doing.

Example two is the extent to which Asian and Middle Eastern savings have until recently supported the dollar. The Japanese and Chinese authorities have been buying huge amounts of US government securities to hold down their currencies, and so, in the process, helping to finance the US deficits. The surge in the oil price has led to a similar surge in Middle Eastern investment in the US, though it is harder to track the flow as much comes indirectly through London rather than directly into the United States.

Now it is the threat of a slow-down of such investment that seems to be depressing the dollar. An executive of a Swiss bank told me how he had a moment of clarity when he saw Congress block the purchase by Dubai of some US ports that were run by the UK company P&O, for which it was making a bid. That, he reckoned, would be taken as a signal in the Middle East that the US would start rejecting foreigners purchasing their assets, and the dollar would duly fall. The prop would be taken away. No one can prove a link, but that did indeed come just before the present dollar decline.

The third example of the rising power of the "new" economies is the bid by Mittal Steel for Europe's largest steel maker, Arcelor. Arcelor is based in Luxembourg, though many of its operations are in France. It was a critical element in the founding of the European Coal and Steel Community in 1951, the precursor of the European Union. Now it seems likely to be taken over by a rival controlled by an Indian family. This is sending a shiver through Europe. Just last week Angela Merkel, the German Chancellor, made a speech calling for European industrial champions - a telling sign of a wider concern that power is slipping away from the Continent.

So when trying to calibrate this spate of concerns about the state of the developed world economy, we need to be aware the driving force for global growth has shifted. It used to be the US, Japan and Europe. Remember all that talk of Germany being the "locomotive" for European growth, pulling the other weaker economies along behind it? Remember the adage "When America sneezes, Europe catches a cold"?

That model is rapidly being superceded. Instead, economic power has become much more balanced. The key relationship is not between the US and Europe. Instead it is a much more complex set of forces, involving the US, to be sure, but also China, India, Brazil, the oil exporters of the Middle East and Russia. This is a new state of power relationships and no one fully understands them.

There are very good reasons for a bit of caution about the fall of the dollar, just as at a rather different level there are good reasons to be cautious about London house prices. The seeds of the next global downturn may have their roots in the US, but how the world pulls through it will depend on the way that China and India react. And I don't think they want to see a global recession if they can do anything to stop it.