Hamish McRae: Who can we count on for growth if we can't count on American consumers?

The holiday season is over. Now things get serious again. Over the past week some of the issues have been brought into focus that will shape the world economy - and international investment - through the autumn.

These vary from country to country and region to region, as you might expect. For example, here in Britain we have had evidence of continued strength in the housing market, while in the US, that market is pretty dire. So we are expecting another rise in interest rates here, perhaps in October or November (but not in September), whereas in the US there is a growing consensus that the next move may well be down.

On the Continent we had Claude Trichet, president of the European Central Bank, talking of "strong vigilance" on inflation - code for expecting a rise in rates after the next ECB meeting on 5 October. There has been much better growth in the eurozone through the summer, which gives the ECB the opportunity for an increase.

Put these points together and you can begin to see one of the two key issues of the autumn. We can be pretty sure that the US economy will slow down and it is possible that it will come to a halt in the early part of next year. The question then is whether demand in continental Europe, the UK, Japan and China will increase enough for these to take over as global leaders in driving growth. Some words about this, and then some thoughts about what seems to me to be the other key issue: what is happening to the various forms of inflation?

I was in the US last week - in Michigan, home of the auto industry - and two points hit home. One is that the shadow over that sector casts a longer shadow over the whole Michigan economy. The housing standstill in the US as a whole translates to falling prices around Detroit. The second is that a lot of US consumers really are making the switch out of 4x4s to smaller vehicles, with the benefits going to Honda and Toyota rather than Ford and GM.

The big question is whether the housing slowdown will lead to a serious slump in consumption more generally - maybe even to a recession in the early part of next year. There clearly is some risk, and I have seen that risk put as high as 50 per cent. But even if there is merely a slowdown, as the Federal Reserve expects, that still leaves a hole in global demand. The world has been relying on the US consumer for the past five years, with US consumption in some years accounting for nearly half the increase in global demand.

So who will fill the gap? China will continue to grow strongly, for though Chinese exports are heavily dependent on US demand, there are plenty of domestic consumers who would like to take up any slack. But China alone cannot keep the world economy moving, and there are signs that the Japanese domestic spurt is now over.

The UK will presumably carry on at well over 2 per cent growth, particularly in light of the recovery in house prices, and that will help a bit. But the onus is on the eurozone. In round numbers its population is the same as the US: 300 million. And it is a rich 300 million too, with an average GDP per head of $31,000 (£16,000) a year. But consumption is only 57 per cent of GDP, against 70 per cent of GDP in the US (and 65 per cent here).

That leads to the great imponderable: why don't Europeans spend more? Part of the answer is taxation, for money paid in tax is money not available for people to spend on themselves, but that can't be the whole answer. As the Bank Credit Analyst team in Montreal points out, there has been a recovery in eurozone business but eurozone consumers remain much less positive. Indeed, the gap between consumer confidence and industrial confidence has seldom been wider. Household spending in the eurozone is rising at less than 1 per cent a year.

Conclusion of all this? There will clearly be some slowdown in global growth next year. How serious it will be is much harder to gauge, but at least we do know that is the thing to watch for through the autumn.

As for the other big issue, inflation, I think most of us are becoming increasingly confused. First of all there is the distinction between so-called "core" and "headline". Then there is one between essential and discretionary spending. And finally there is one between current inflation and asset inflation.

The core and headline rates over the past decade for both the US and the UK are shown in the graphs above. A couple of things are obvious. One is that if you believe the figures, the US in general now has higher inflation than the UK. The other is that headline inflation in both countries is now consistently higher than core inflation.

So which matters more? In the late 1990s the perception was that core was the thing to watch, for by cutting out things such as energy, food, alcohol and tobacco, the index ironed out fluctuations in these more volatile items.

But to most people, fuel and food are core, and to some, booze and fags would be too. At the annual informal meeting of central bankers at Jackson Hole in the US, Charlie Bean, chief economist at the Bank of England, argued that core inflation was meaningless in a rapidly changing world. Chinese import demand was driving up the price of energy and commodities, but its exports had been pushing down the price of manufactured goods. Central bankers should not look at the benefits of globalisation while ignoring the downside.

GFC Economics thinks that core inflation is still a useful concept. Among other things, it tells you whether rising energy prices are feeding through the system into higher prices more generally. That in turn gives a signal as to whether central bankers should start worrying. Still, I think many of us will worry about the actual inflation we face, rather than some artificial measure of it. And incidentally, the UK consumer price index is a pretty hopeless indicator of what we actually have to pay for things. It does not, for example, include council tax or housing costs.

It is quite possible that the current inflationary pressures will ease next year. If there is a significant slackening of global growth and if therefore world energy prices fall back, that will take the heat off. Central bankers and people filling their cars will be relieved. But I don't think any of us - in Britain, America or on the Continent - should expect any early return to the low interest rates we had at the bottom of the last cycle. That was an aberration - and expect the next move in rates to be up.

Blessed are the women of Andorra...

It sounds a bit nerdy but one of the most interesting little booklets that comes across my desk is the Pocket World in Figures, published each year by The Economist magazine.

The latest one has just landed, full of such titbits as the people with the longest lifespan in the world being women in Andorra, at an average of 86.6 years. At the other end of the scale there are some profoundly disturbing numbers: the life expectancy for women in Swaziland, for example, is 29.2 years.

In the economic field, the UK is interesting in that the figures reveal just how specialised the British economy has become - in particular, the scale of the shift out of exporting goods into exporting services. Many people probably know that we are the second-largest invisible exporter in the world, after the US. But I had not realised that we are now only the seventh-largest visible, or goods, exporter, having fallen behind Italy. Put the two together, though, and the UK is the world's third-largest exporter, after the US and Germany and ahead of Japan.

On most economic measures Britain is middle of the pack among the other developed countries, doing only OK in business creativity and research. On overall global competitiveness we are now down to 20th, but on the measure of the business environment we are seventh, which is ahead of the US.

Unsurprisingly, the West End of London now has the highest office rents in the world, but the country seems to be able to continue to attract inward investment, being second only to the US and ahead of China.

Other nuggets include Leb- anon having the worst obesity problem in the world (quite aside from its other difficulties), Cyprus the highest marriage rate, and Norway the highest cost of living, with Iran the lowest.

Finally, to cheer up Britons, the UK has also become the world's largest exporter of "cultural goods" - more even than the US. These are defined as including art, antiques, books, music and cultural services - and newspapers. So at this very moment you are engaged in a cultural activity. Enjoy it.

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