Chinese growth 'to overtake US'

By Edmund Conway, Economics Editor in Washington

Last Updated: 5:35pm BST 19/10/2007

telegraph - uk

For the first time in modern history, China will next year contribute more to global economic growth than the United States.

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	China, India and Russia combined have already 'accounted for one half of global growth'

The landmark moment was predicted yesterday by the International Monetary Fund and is the latest illustration of the fast-growing Asian country's importance to the world economy.

While China's economy is still far smaller than America's, it has overtaken the UK as the world's fourth biggest economy. With the IMF projecting 10pc growth this year, the country will pump more new money into the global system next year than the US, which is expected to grow by just 1.9pc.

If the forecasts spelled out in the IMF's World Economic Outlook prove correct (and the institution did not foresee the recent credit crunch), China's continued resilience will come at just the right time for the global economy, as the developed world enters a period of slower growth.

It is what many have called the "happy handover" scenario and is already taking place as China, India and Russia combined have already "accounted for one half of global growth over the past year".

As the IMF points out in its biannual report, the US and western European economies are facing a major slowdown. It has made major cuts to growth forecasts for the developed world. Worse could be in store, according to the IMF's chief economist Simon Johnson.

"The principal risk going forward is that prolonged disruptions in financial markets and a possible weakening of asset prices and confidence could have a more severe impact on economic activity than anticipated in our baseline projections," he said.

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The main worry is that the credit crunch, in which concerns about the US housing market have caused major jitters about other kinds of debt, persists for longer than another few months.

Mr Johnson compared the pre-crunch markets to a "forest that has not seen a fire in many years", adding: "When problems ignited in the US sub-prime mortgage market, the fire 'jumped' in surprising ways to other areas."

This meant the "fire" spread to the wider credit markets in the US and further afield, including the UK, to bank lending and to commercial paper markets, where companies borrow. Even further cuts in interest rates might not be enough to bring confidence back, the IMF warned. However, while interest rate cuts seem likely in many countries, it also emphasised that inflation remains a threat with oil prices at record highs.

Food prices will also remain high because of increased demand, poor harvests, and global warming, which has contributed to falling crop yields and to arable land being diverted for biofuels.

The IMF said yesterday it was beginning a major study into the economics of global warming.