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HSBC by the way has pencilled in 1

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HSBC, by the way, has pencilled in 1.8 per cent for the UK this year, the same as it expects for the eurozone.This situation gives rise to a string of policy dilemmas, first for the US but also affecting the rest of us. Can, most obviously, the US keep growing despite its huge debts? Or might further dollar weakness feed into higher prices? Has the Federal Reserve increased interest rates by enough to choke off the asset bubble but not so much as to cause a plunge in consumer demand?Over-simplifying a bit, cheap imports from China hold down prices in the US, UK and Europe and they increasingly seem to be holding down wages, too. In addition, European and UK wages are held down by the lower wage rates in the new EU member states. In the UK, that is because they provide a new source of skilled labour, supplying about half the annual increase in our labour force, while on much of the Continent pay is held down by the export of jobs to the east as companies build plants there.

This is a big influence on German wages and conditions, and the squeeze on German costs then passes through to costs elsewhere on the Continent. Countries that fail to cut their costs, most notably Italy, lose market share.But while it is true that costs are held down by the new competitors, those competitors push up commodity prices This adds to the central banks' troubles. Should they be relaxed about inflation because prices are stable? Or should they worry about asset prices which, in the UK and US at least, have been shooting up? Or should they worry about commodity prices because in the past these have fed through into higher prices in general?These are the issues that will dominate the world economy this year There will always be surprises. Last year, one surprise was the doubling of the oil price, while a second was how little damage that did to global growth.

By definition, you cannot predict a surprise, but you can point to areas of the world that seem robust and areas that look fragile.It is, for example, quite hard to see what might end the booms in China and India. Both economies have coped with the rise in energy prices astoundingly well. If there were to be another jump in the oil price - which given the tight supply I would not at all rule out - it would chip some growth away but would not stop it. The US economy also coped well with higher energy prices, and in addition, higher interest rates - plus huge physical devastation from the hurricane season. So the US should be able to cope with surprises.Meanwhile, the laggard of the world economy, continental Europe, is at last showing better, or at least not such awful growth. Last year, the eurozone grew by only 1.3 per cent.As for us, well I suppose that the general expectation of another year of sub-trend growth is about right - nothing terrible but nothing very exciting.

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