US, Japan face similar challenges with Europe

By Jim O'Neil

Goldman Sachs chief global economist

As we approach the Korea G-20, it seems clear that we are entering a new economic order. Many of the largest emerging nations, especially the so-called BRICs , are showing signs of very strong cyclical recovery from the crisis, while at the same time, many of the Western economies are struggling to maintain sustainable recoveries without the involvement of substantial government actions.

It is a good job that the G-20 has come into existence in this regard, and it is important that this meeting is taking place. It is important that G-20 members, which after all make up the majority of the world's economy get to not only understand each other better, but interact between their economies.

On a truly global basis, for example, thinking about all of these economies together, the world is actually recovering from the crisis well. We forecast world GDP growth close to 5 percent for the next two years, quite optimistic.

The consensus is somewhat less excited but nonetheless is forecasting a robust 4.3 to 4.4 percent. Of course, much of this growth is originating in the emerging world, with China especially buoyant.

The other BRIC economies are all showing robust domestic demand also, with even Russia showing more signs of strong recovery. Outside the four BRIC economies are also growing strongly, with Indonesia and Korea also notable.

In many cases, the pace of demand is so strong, that policymakers in these parts of the world need to tighten monetary and fiscal policy in order that inflationary pressures don't rise significantly.

Of course, this is quite a new challenge for many of these countries, some used to pegging exchange rates closely to the U.S. dollar, and mentally used to taking their policy lead from the West.

If the countries are to succeed in developing themselves as more robust and moving into permanently stronger, less externally reliant economies, then these are the key challenges they face.

Moving into an era of sustained domestic consumer driven demand for all of these countries, with less reliance on exports to the developed countries is essentially their role, in helping make this G-20 successful and contributing to a healthy decade ahead.

In this regard, there are some very encouraging signs with respect to world imbalances, especially as they relate to China. After four months of 2010, the accumulated Chinese trade surplus is around 2 percent of GDP, which is less than a quarter of what it was at its peak pre-crisis.

Much of this improvement has come from robust import growth as China seeks to adjust its economies driving forces. This is highly welcome. You can see evidence of the same development in many leading western companies and in some cases, clearly in national export data.

Germany especially, is showing very strong export growth to China. At the current pace if maintained for the next year, German exports to China will become as big as their exports to France, a truly powerful sign of the new global economic order.

All of these generally positive developments shouldn't be lost by the mindset dominant in the G-7 countries and other parts of the West. Indeed, some of the other developed G-20 nations, such as Australia are benefiting clearly from the strength of demand in the emerging world, so much that they have managed to "exit" somewhat from many of their crisis policies.

The same cannot be said unfortunately for the U.S., Europe and Japan, and the core of the G-7 countries need to be careful to nurture their recoveries, and to maintain the balance between appropriate friendly economic policies to keep the encouraging signs of post crisis expansion alive, and to ensure that these recoveries are not permanently reliant on emergency low interest rates and extremely stimulative fiscal policies.

The crisis that has erupted in some parts of the Euro area, and the challenge to the European Monetary Union (EMU), are clear reminders of the ability of markets to demonstrate their collective dislike very quickly for policies that appear unsustainable.

Each of the U.S., the UK and Japan has the same broad challenges as some of those within EMU, although the exact nature differs. This means close understanding and a co-operative spirit is necessary, if exact co-ordination of monetary and fiscal policies.

In their initial days, and at the depth of the global crisis, it was important for monetary and fiscal policies to be coordinated. In this, somewhat more complex, post crisis phase of the world economy, the G-20 members need to understand how the modern world is evolving. Let's hope they can. If they succeed, a more exciting world lies out there that many believe.

Jim O'Neil has been the head of global economics, commodities and strategy research for Goldman Sachs since 2008. In this role, Jim manages the firm's economics, strategy and commodity research and the output of these teams around the world. Jim is the creator of the acronym BRICs and, together with his colleagues, he has published much research about BRICs, which has become synonymous with the emergence of Brazil, Russia, India and China as the growth opportunities of the future. Jim received his Ph.D. in 1982 from the University of Surrey after graduating in Economics from Sheffield University in 1978. In 2009, he received an honorary doctorate from the Institute of Education, University of London, for his educational philanthropy.