Small earthquake: few hurt. This is what the International Monetary Fund is saying in its latest World Economic Outlook: world output grew 5.4 per cent last year and will grow 5.2 per cent this year and 4.8 per cent in 2008, only 0.4 percentage points less than expected last July. What conclusion, then, are we to draw? Is a substantial financial shock at the core of the world economy nigh on irrelevant? The answer is: maybe so, but there are also appreciable risks.

According to the IMF, the world is in the midst of a period of growth unrivalled since the early 1970s. Between 2004 and 2008, it forecasts, global growth will average 5.1 per cent a year and the rate of growth of world output per head will average 4 per cent (see chart). The driver of global growth has been emerging economies in general and Asian emerging economies in particular. Between 2004 and 2008, says the IMF, growth of emerging economies will average 7.8 per cent a year, while high-income countries will average only 2.7 per cent. Never before has world growth been so much higher than that of high-income countries.

These figures are computed at so-called “purchasing power parity (PPP)” exchange rates, which greatly increase the weights of large and poor emerging economies, such as China and India. They give a correct picture of the rise of economic welfare, but a misleading one of expenditures around the world. At market exchange rates, world economic growth is forecast to average only 3.6 per cent a year between 2004 and 2008. The gap between growth at market and PPP exchange rates has also never been so big.

Fundamental, however, is the IMF's optimism about emerging economies, despite its caution about the US, whose economy is forecast to grow at 1.9 per cent this year and next. The IMF expects demand in the rest of the world to be largely decoupled from weakness in the US.

Inevitably, this rosy forecast comes with health warnings. The World Economic Outlook stresses financial conditions and domestic demand in the US, Europe and Japan as bigger threats now than in forecasts in April and July. Correspondingly, downside risks from inflation and the oil market are smaller than before, while the risks posed by global imbalances are much the same in magnitude.

All this is plausible. The impact of the “credit squeeze” and downturn in the US housing market could be anywhere between mild and severe. An analysis of the financial squeeze concludes, for example, that “recent financial turbulence has not been unusually large compared with previous episodes”. But it notes three reasons why the outcome might be worse than this suggests: links with the housing market; loss of confidence in securitised credit markets; and impacts on the health of the banking system. As Ken Lewis, boss of Bank of America, recently remarked: “I've had all of the fun I can stand in investment banking at the moment.” So, indeed, have most of us.

Further adding to the downside risks is the vulnerability of housing markets in high-income countries. The IMF's analysis suggests that France, Ireland, the Netherlands, Spain and the UK may be particularly vulnerable. But even Germany would be affected by a housing-led downturn in its European partners.

In emerging markets, happily, demand risks are seen as being to the upside. One reason for this is the impact on money, credit and asset prices of their huge accumulations of foreign currency reserves. In the long term, these may threaten an upsurge in inflation. In the short term, however, they are an additional stimulus to domestic demand.

At the global level, the IMF is less worried about inflation than in earlier forecasts. Today's short-term inflation pressures are related to tight commodity markets and may be exacerbated by weak productivity growth in the US. The modest forecast slowdown should be a help, then, so long as central bank easing does not undermine their longer-term credibility. Oil markets are particularly tight. Given prospective trends in demand, they are likely to remain so. But, again, weaker growth will reduce the pressure.

The IMF also rightly picks out global imbalances and the management of capital inflows into emerging economies as sources of risk. These phenomena are closely related, since the world's private sector is trying to put money into the emerging economies that the latter are then recycling outwards as official reserves. In 2007, for example, the IMF forecasts a current account surplus for all emerging economies of $690bn and another $495bn in private net capital inflows. This is then offset by government outflows, via reserve accumulations, of an almost incredible $1,085bn (see chart).

Yet, encouragingly, the global imbalances are now expected to shrink a little, as a share of world GDP. The counterpart of the decline in the US deficit is expected to be increased spending by oil exporters, while Asian emerging economies will export ever more capital in relation to global output (see chart). China, with a current account surplus expected to be close to $400bn this year (12 per cent of gross domestic product), is the new giant of this massive recycling.

The broad picture, then, is of continued strong growth with downside risks. It is at least a plausible one, so long as the dynamic of the “great convergence” is sustained, alongside the stability of the “great moderation”.

Ultimately, this happy outcome depends on sustained openness and monetary stability. But this combination can no longer be ensured by developed countries alone. Emerging markets have now become big players. They will have to accelerate domestic demand, reduce accumulations of currency reserves, allow exchange rate adjustment, open markets and, in short, be “responsible stakeholders”, if the growth dynamic is to be sustained in the years ahead.

For what is now happening is an historic shift in economic weight. How well will the world handle this challenge? In truth, it has gone better than one might have feared even a few years ago. Yet the ability of the international institutions – and particularly of the IMF – to help is limited. Partly because of the iron determination of the Europeans to hold on to their privileged position, the IMF, like the Group of Seven leading high-income countries, is now largely an observer of events. But, thanks to the work displayed in the World Economic Outlook, it is at the very least better informed and so, as a result, are the rest of us.

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