Will Asia remain immune to US credit woes?

Thus far, the emerging markets have largely ignored the economic slowdown and financial turmoil in the US. Although economies are even more tightly linked by trade and financial flows than in the past, the US is no longer the only locomotive pulling the train. Last year, China accounted for 30% of the increase in world GDP (on a purchasing-power parity (PPP) basis, which is defined by the actual purchasing power of a country's currency rather than its official exchange rate), compared with only 12% for the US. This year, the slower US growth will reduce its share to only 9%, while China's share will rise to 33% and India's to 12%.

Although the US is still the world's largest economy, accounting for 20% of global GDP on a PPP basis compared with 15% for China, which is number two, China is growing 11% this year, compared with 2% for the US and 9% growth for India. At least on a PPP basis, the US is still the largest locomotive, but India and China are supplying most of the power.

High commodity prices are helping many developing countries. Although emerging Asia is still a net importer of commodities, both Latin America and Africa are major exporters. These regions have been aided by strong commodity prices. Higher commodity prices are, in fact, pretty much a zero-sum game for the world economy, because they help the producers but hurt the consumers, at least when they are propelled by demand increases rather than supply disruptions.

Key risks to our baseline economic forecast include a prolonged recession in the US or a disorderly correction in international trade imbalances and capital flows (see Table 1). A significant disruption of oil supplies could also damage the world economy.