Hamish McRae: Winter is coming but growth is set fine: why the world won't go into hibernation

A few things have happened in the past few days that suggest the world economy will come through the winter in decent enough shape. The most important of these are the falling oil price and the evidence that declining US house prices will simply slow the economy rather than tip it into recession, as some had feared.

There are other promising signs: Italy, long the dog of the eurozone, has started to do rather better; here in Britain, growth has picked up; and the strong growth from China and India that we have now become used to seems to be continuing. Autumn may have officially begun, but as yet, the winds seem far from chill.

That the oil price has fallen to its lowest level for six months matters only if that price stays below $60 a barrel or comes down further. Taking a less optimistic view, what can sensibly be said about the possibility of it bouncing back to $80 a barrel or more? It was, after all, only a few weeks ago when people were warning of $100.

It really depends on China. Demand for oil in the US has been flat for the past 18 months, and thanks to some slight increases in production, imports have actually been falling. By contrast, demand from China has been up by around 10 per cent a year since early 2005 and in the past couple of months it has been especially strong.

Now, that demand may well fall off if Chinese growth slows; some calculations from the Bank Credit Analyst group think it will. So, in the next few months at least, the oil price may have further to fall. There won't be any return to cheap oil but it seems clear that $80 a barrel is unlikely as the world as a whole makes a huge effort to use less of the stuff.

Whatever happens next, the falls to date have been enough to cut the price of fuel for US drivers, and that will do a lot to underpin their confidence. Filling the tank is a necessity, whereas many other purchases are voluntary, or at least can be put off a while.

As you can see from the left-hand graph above, the fall in the oil price has been supplemented by lower natural gas prices, also helpful. For the next few years the black stuff will surely remain expensive, due to Chinese demand, and there will always be the possibility of a sudden upward spike in the cost. But for the next few months, barring some catastrophe in the Middle East, the price could drift lower.

That would have several results. From a US perspective, it would not only take the heat off consumers - as noted above - it would also take the heat off the Federal Reserve. The Fed has been resisting putting up interest rates further, pegging the Fed Funds rate at 5.25 per cent for the past two months - the second no-change was last week. Headline inflation, according to some calculations by Capital Economics, is likely to drop from its present 3.8 per cent a year to around 2.5 per cent this month.

That is still high, and core inflation will be higher. Nevertheless, falling inflation gives credibility to the Fed's policy and some are suggesting that the next move in US rates will be down rather than up. That is one of the reasons why the dollar has been weak recently.

Put simply, if the fall in US house prices were to become serious and really start to undermine consumption, then thanks to lower oil prices the Fed would have some leeway to cut rates.

As for housing, well, the evidence is mounting that the US is now facing a sharper downturn than we did in the first half of last year. Intriguingly, there seems to be some relationship between property prices and the savings ratio. As prices rose, people felt less need to save as their assets were rising in value; now they feel more need to save again (see the right-hand graph). This rise in savings had to happen sooner or later and, if it is sustained, that would be one component of a wider adjustment in the US. It is not just people who have to save more: the country as a whole needs to do so. We may start to see a halting in the rise of the US current account deficit, which if it were to happen would be a really important turning point.

Pull all this together and my own conclusion is that we are in the early stages of the big international adjustment that everyone has been waiting for but that has yet to occur. That is a narrowing of the US current account deficit, some decline in the dollar and an end to excessive American consumption. But - and if this is right, it is good news - such progress has been gradual so far.

From the point of view of the rest of us, the best thing that could happen now would be for demand from the rest of the world to pick up and replace any downturn in the US. From the narrow perspective of the UK, there does seem to be faster-than-expected growth this year, though this is supported by high government borrowing that will at some stage have to be reined back. The performance of the eurozone is uneven but I was intrigued to see a sharp fall in Italian unemployment last week to 7 per cent - the lowest for a decade. This may seem high to us but it is now below France or Germany, so the laggard of core Europe has on one measure become the modest star.

More generally, there does seem to be a pick-up in Europe, and that is particularly welcome at this time. Japan, now with a new prime minister, also looks quite encouraging.

Then of course there are the "Brics" - Goldman Sachs' acro- nym for Brazil, Russia, India and China. Here the boom continues. It is uneven and, in the case of Russia, heavily dependent on energy exports. But as these countries grow relative to the G7, what they do determines the growth of the world economy to a greater extent than what happens in the G7.

Anyone can do the maths. China is now a bigger economy than Britain and will pass Germany in the next three years. So 10 per cent growth in China adds around five times as much additional demand to the world as a Britain growing at 2.5 per cent. In fact, it adds almost as much as an America growing at 2.5 per cent.

All this suggests that over the next six or nine months, there will be continued solid global growth - and a growing world economy is good news for any open national economy such as our own.

Anyone who tries to give precise predictions about growth, interest rates and the various other economic variables ends up with egg on their face. However, the evidence of the past few days is quite encouraging - so encouraging that the Bank of England may well feel it can safely increase interest rates again before the autumn is out.

Investors take Thai coup in their stride

Money is politically colour-blind. We have always known that the international investment community is none too concerned about the political hue of governments so long as investors' rights are protected and returns are good. Much the same goes for the international business community: witness the flood of money into China.

A good example of this tough-minded, arguably amoral, stance came last week, in the markets' response to the Thai coup. The elected but unpopular Prime Minister was deposed by the military while he was out of the country, at the UN in New York. The military got the support of the King and the coup was bloodless; the tanks were bedecked with ribbons and flowers.

However you dress it up, though, a military coup is an anti-democratic procedure, yet the financial markets reacted with remarkable sangfroid. Shares and the currency nudged back a bit and then recovered, while the main regret of foreign investors seems to be that, with things so calm, there hasn't been much of a buying opportunity.

That squares with the view on the ground. I happened to be in neighbouring Malaysia last week when the coup took place and found no one troubled by the event. The whole South-east Asian boom has flourished under regimes that have combined growing economic freedom with tough political direction, and the combination has undeniably worked. Thailand and Malaysia have transformed themselves from developing to developed-country status in a generation.

But before anyone concludes that if people get rich quick, then they don't care about the politics, consider two encouraging points. One is that the military coup was strongly criticised in Kuala Lumpur in the New Straits Times as a setback for Thailand and bad for the entire region. The other was that one of the reasons Prime Minister Thaksin Shinawatra was deposed was that he was felt to be corrupt. So it was, in a sense, an assertion of a desire for honest government.