Hamish McRae: With a little more restraint Asia could once again rescue the world economy

Could the emerging world save the developed world again? The past few days have seen a new shudder run through the financial markets, with rising fears of a pause in US growth, maybe even a double-dip to the recession. The US housing market in particular has experienced a double dip, with prices back to the levels of 2002, and both consumer and industrial confidence remain extremely weak. Within Europe there are rather different reasons for concern, with Greece inching towards another rescue and/or default, and even the great engine of European growth, Germany, seeming to slow a little. And as anyone who has seen any UK news will be very aware, the economy here continues to disappoint.

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Put all this together and it is almost certain that some sort of slowdown is happening across the developed world. That is worrying because most developed countries have yet to get back to their previous peak in output, reached some time in 2008, and because there is no ammunition left in the locker. They cannot ease fiscal policy, for the only debate there is whether to tighten a little more slowly. And they cannot ease monetary policy any further, partly because of fears about inflation but also because interest rates cannot go any lower and quantitative easing seems to have lost its effectiveness. Even the most hawkish of the main monetary authorities, the European Central Bank, is tightening policy only very slowly.

So if something goes wrong now there is really nothing much that can be done. We are, so to speak, on our own. That awareness, as much as anything else, has led to this new bout of jitters. If policy cannot help, or at least help much, then we have to rely on the self-healing characteristics of the world economy: the collective wisdom of the world's companies, financial institutions, savers and consumers. That would be dispiriting were it not for something else: the emerging world is still growing strongly, as much of it did right through what was for the rest of us a serious recession.

You can see that in the main graph, from the IMF's World Economic Outlook, which shows how the emerging world as a whole just avoided a recession while the developed world plunged into one. It also shows how the two largest emerging economies, China and India, grew strongly throughout the period.

They are still growing strongly now. The lead indicators that are most closely watched are the Purchasing Managers Indices for the various countries. The idea itself is very simple: you ask a number of companies whether they think their output will go up or down in the next period and you calculate an index from the pluses and minuses: 50 is the mid point on the index so anything more than that suggests expansion, while anything less signals contraction. You can ask all sorts of questions: input and output prices, employment intentions, the current position, expectations in any forward period, and so on. And you can ask different segments of the economy: manufacturers, retailers, the construction industry. So it gets more complicated in practice. But the idea – that you get a feeling for shifts in the mood of the business community – is very helpful, as much for the direction as for the actual numbers.

Thus the latest UK manufacturing PMI, which fell from 54.4 to 52.1, was saying our manufacturers have become significantly less optimistic over the past month but on balance still expect growth. Analysing this becomes a question of whether you like to see the bottle as half full or half empty. The markets were more taken by the decline, but at least the numbers are still positive. The latest eurozone PMI numbers are also still positive, at 54.6.

But what about Asia? The other chart shows some recent numbers. No sign of a slowdown there. Taiwan is still strongly positive – interesting because although it is a small economy it gives a good feeling for global demand for computer hardware, an area in which it has specialised. South Korea, another export-oriented economy, has seen some easing but remains positive. As Capital Economics notes: "This data suggests that manufacturing sectors in the region have so far been resilient to the disruption in Japan since its mid-March natural disaster."

The most important indicator, of course, comes from China. There are two different series of PMIs, the official one and one calculated by HSBC and Markit. Both have slackened somewhat in recent months but are still positive. The official indicator, shown in the graph, is currently 52.

The general perception here is that China will succeed in achieving a so-called "soft landing". Instead of growing at a double-digit rate it will shade back and grow at, say, 8 per cent. That has been the aim of the authorities for some time but of course it is tricky to slow things, even in a command economy, without putting on the brakes too hard. So far it is on track.

Where does this argument lead? Well, there is undoubtedly some slowing taking place. But this talk of another recession reflects very much an American perspective and maybe in our most gloomy moments, a British one. Viewed from continental Europe the economic climate remains positive. The latest World Economic Survey from the Ifo Institute in Germany, comments: "The upturn in the world economy will continue in the coming months but will be somewhat more bumpy than in the recent past."

Viewed from Asia the problem is much more how to slow things enough but not too much. Assuming that the region achieves this transition, that could be really helpful to the rest of us. We need continued growth, but a somewhat slower pace would take pressure off commodity, food and energy prices. Since energy prices in particular have been one of the real drags on economic output in the West, any fall-back would be very welcome. In the long term it may well be in the environmental interest of the world to have reasonably high energy prices and we will get that. The world's supply/demand balance in oil is already very tight and will, if anything, tighten further. But in the short term a fall in the oil price is just what we need to boost consumer confidence and cut inflation more generally.

So will Asia save the world economy? Yes, in the sense that it will maintain global demand and that will eventually filter through to the rest of us. But yes in a second sense, too, for by growing at a somewhat less helter-skelter pace, Asia will also help reduce pressure on real resources and on inflation. The key overriding issue is the need for balance. The world can continue to recover only if it corrects the excesses of the previous boom. But the developed world, or at least most of it, needs more time to correct its mistakes. Meanwhile the main drivers of demand will have to come from elsewhere, and particularly from Asia.