When the US used to bestride the global economy as a financial colossus, it was easy to argue that the rest of the world's economic fate ultimately rested with the denizens of New York, Los Angeles, Silicon Valley, Chicago and the rest. Lately, though, the relationship has changed. Notwithstanding the ongoing durability of its consumers, the US economy is no longer the engine of global growth. Consensus forecasts for US economic growth have drifted lower over the last 18 months but, for the world as a whole, they have risen.

The secrets of global success are to be found not so much in the US but, instead, in China, India, Russia, the Middle East and a fistful of other emerging markets. They may, collectively, still be small in size relative to developed world economies but their growth rates are nothing short of extraordinary. Supply-side factors drove this transformation, notably the changed political relationships of recent years and the remarkable collapse in the cost of information flowing around the world. However, the main concern is whether inflation will be making an unwelcome return.

Admittedly, measures of inflationary expectations remain mostly well-behaved and inflation rates are low by past standards. Nevertheless, the warning signs are there. Commodity prices remain elevated. Money supply growth has been rapid. Asset prices have mostly been buoyant and increasingly closely correlated. Most recently, bond yields have spiked higher. For the developed world, these developments are troublesome. US growth is not particularly strong but inflation is stickier than the US Federal Reserve would like. UK growth is no firmer than usual, but inflation is uncomfortably high. In both cases, arguably, the inflationary threat is not home grown.

Inflationary dangers can be sub-divided into real and monetary components. Ever-rising commodity prices are the most obvious real danger at this stage. The treatment of these gains, though, may have monetary consequences. However, if global inflationary pressures show up mainly in the form of rising food and energy prices - consistent with recent experience - stable core inflation may give rise to unacceptably high headline inflation.

Central banks should increasingly worry about headline inflation. Some simple calculations show why. Should the Chinese, per head, ever get close to consuming energy in the same way as their American brethren, they would be consuming the entirety of the world's current energy production. That, of course, is most unlikely. Higher prices would surely intervene.

As for monetary effects, the most important global linkage is that between US monetary policy and the monetary policies of those emerging markets tied to the US, in particular China, Russia and the Middle East. These links made a lot of sense when, collectively, the US and emerging economies were strong. However, this is no longer the case.

Overall, the global monetary conditions are perhaps too loose. As a result, monetary growth has accelerated, asset prices have strengthened and central banks have become increasingly nervous. In these circumstances, looser monetary conditions materialise in a number of different guises: Banks lend on bigger income multiples, the spreads between official, deposit and lending rates narrow, private equity gets easy access to credit and house prices tend to rise. For these reasons, both eurozone and UK interest rates are expected to rise further later in the year. Many other countries will follow suit.

China faces some difficult choices. It wants only a modest exchange rate appreciation but at the same time wants to be able to tighten domestic monetary conditions. Doing so would normally require higher interest rates which, in turn, would put more upward pressure on the exchange rate. One possible way to resolve this apparent conflict is through the encouragement of capital outflows. China's underlying problem is trapped savings, both through an absence of properly-developed domestic credit markets and a lack of willingness and ability to invest abroad.

Although higher interest rates would undoubtedly drive up capital inflows into China, deregulation might encourage greater outflows, thereby limiting the degree of any subsequent currency appreciation. Ultimately, any move in this direction would imply a diminution of Governmental control over some aspects of Chinese economic life. Perhaps this is the price to be paid for greater economic integration with the rest of the world.

As for the US, the outstanding economic paradox of our times is the strength of consumer spending set against the weakness of the housing market. Although difficult to prove, it is suspected that some of this consumer buoyancy owes something to activity elsewhere in the world. Traditional economic models downplay US economic dependency on developments in other countries. Exports of goods and services are a relatively small share of GDP, suggesting that positive multiplier effects stemming from external shocks are relatively small. Over the years, however, the US has seen its role as the world's financial intermediary grow rapidly. The value of financial services has risen from 10 per cent to 20 per cent of overall economic activity. Much of this is linked to foreign developments.

Hence, the US economy's head is being kept above water by the strength of activity elsewhere in the world. The connections are not very clear, but they nevertheless probably exist. It seems the US is no longer the centre of the economic universe but increasingly dependent on developments taking place in other parts of the world.

This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.

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