IT IS a funny time, isn't it, for the world economy?
In some ways things are all reassuringly normal. The global upswing is picking up pace. The OECD has just upgraded its forecast for developed world growth this year to 3.4 per cent, the fastest for four years. As a result, interest rates are expected to rise as monetary policy leans against the growth to stop things running too fast. We have already had some interest rates increases here. Alan Greenspan, the chairman of the Federal Reserve board, has hinted that the first rise in US rates will come soon.
Dr Greenspan's comment has led to a wobble in the US markets, as they had not fully taken on board the fact that if growth races away far ahead of the natural trend, something has to be done to check it.
Within the eurozone, the expectations have been for interest rate cuts rather than increases, thanks to the fact that growth has not pulled up the economies of Germany and Italy. That is unusual: they ought to be doing better than they are. Nevertheless, insofar as any recovery phase of an economic cycle can be called normal - they all vary a bit - this one does looks pretty typical. As growth becomes embedded, interest rates rise.
The first two graphs, taken from the new Bank of England Inflation Report, show what has happened to short-term rates during the downward swing of the cycle and where rates are "predicted" to go by the markets. The forward lines are not a prediction in the sense that people are asked where they think rates will go. They are rather better than that, in that they show the interest rates available now for longer dated deposits, from which you can deduce where the implicit official rates would be at various dates in the future.
As you can see, the UK is leading the upward swing, but note how the US rates are also expected to move sharply upwards next year, overtaking eurozone rates. Even Japanese rates click up a bit, too.
There are other aspects of the cycle that also appear pretty normal. There has been a big bounce in share prices since the bottom of their cycle, reached in the UK last spring. You frequently get this during the early stages of an economic recovery. It is, after all, the job of the markets to look forward. The present debate in the equity markets is whether profits in the coming year will rise enough to justify the present level of share prices and allow further rises in the months ahead. But again, this is a typical sort of debate that happens at this stage in the cycle.
The central issue is whether companies are now in a "sweet spot" for profits: additional demand has come though but the associated costs of dealing with that demand have yet to rise.
There are however a number of features that make this cycle different. One is the growing importance of the "new" economic giants of China and India. My own quick tally suggests that some 45 per cent of the additional demand that was added to the world economy last year came from non-developed nations. China added about as much demand as the US, while India added as much as continental Europe.
China is exerting its influence on the world economy in two particular ways. On the one hand its booming exports of cheap consumer goods is holding down the price of manufactured products all around the world. It is not just the fact that Chinese goods are relatively very cheap. Fear of Chinese competition is forcing non- Chinese manufacturers to squeeze down their costs too. As a result the price of most goods, throughout the developed world, are either stable or falling.
On the other hand Chinese demand is forcing up the price of raw materials, including oil. The oil price topped $40 a barrel this week for the first time since the first Gulf War. China has now passed Japan as the world's second largest oil consumer. Much of the additional oil demand is for electricity generation. …