Hamish McRae: With low wages and high energy prices, these Brics are building a new world order

It is hard to see what might end the booms in China and India

One week into 2006 and two of the main economic stories both reflect new power relationships. One was the shiver that ran right across Europe as we realised that Russia has the power to turn off the Continent's gas supplies; the other, the concern in the currency markets that China might diversify some of its assets out of the dollar into other currencies.

Neither story in itself is that surprising or even disturbing. Western Europe has been caught in the crossfire of the row between Russia and Ukraine and is not in any dispute itself. And there is no real dispute between the US and China; indeed it would be odd were China not to want to diversify its reserves. Nevertheless, the fact remains that here are two of the great non-G7 economies exerting their powers - two of the Brics (Brazil, Russia, India, China) identified in that famous Goldman Sachs paper charting the shift of economic might away from the G7 industrialised nations.

Expect to see many other examples of this during the coming year. I don't mean this in any malign sense. It is a simple fact of life that what happens to, for example, energy or commodity prices will depend as much, or more, on what China and India do as what we do. As HSBC has pointed out in its latest economic commentary, "The New World Order", Asian countries have become the force behind three big economic surprises in recent months: the driving up of energy prices, the downward shift in Western wages, and the big policy quandries facing Western central banks.

You can catch some feeling of this in the three graphs. For the past decade, growth in the non-G7 world has been consistently faster than that in the G7, save for the glitch that followed the Asian financial market crisis in 1997. The new Asian economic giant, China, now has a larger share of world exports than the old Asian giant, Japan. And while real wage growth was still positive in the US and Germany in the late 1990s, it is now negative. Here in the UK, we are still managing real increases in wages but only just, and the increases are a lot lower than they were in the late 1990s.

Much of the world's growth will again come out of Asia this year. China grew by around 9 per cent last year, India around 8 per cent. By contrast, the US will be pushed this year to grow by much more than 3 per cent, while Europe will struggle to reach 2 per cent. 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. It should be somewhere between just enough for Gordon Brown to carry on claiming he has stuck to his plans, and not quite enough for that claim to be credible.

Two of the potential tensions, however, have become clear in the first few days of the year: what happens to the price of energy and what happens to the relationship between China and the US? To those, I would add: what happens to US house prices and what happens to the dollar? On balance, I think both will be weakish but not catastrophically so.

If that is right, we are in for a year of more of the same: good global growth but not very good UK or European growth. At the moment there is a debate as to whether this will be the first year for more than a decade when the UK grows more slowly than the eurozone. While I can see the political importance of that - how tarnished is Gordon's halo? - I don't think it matters in substance. Ten years from now, it will be clear we were in the middle of a historic transition - a shift of power analogous to that which took place after the First World War away from Europe to the US. Now the shift is away from Europe, and to a lesser extent from North America, towards Asia. It is fine. We just need to get used to it.

Don't ask a Soprano to stop the big brands

A short visit to Naples last week made me aware of a world we have lost. No, not the delights of Pompeii but a world before European cities were full of the big brand names that have crowded out individual shops and family-run businesses. True, there are some McDonald's but there are no Hiltons or Marriotts and, though they must exist, I did not see any supermarket chains. There were some top-of-the-market brands - Gucci, Versace and so on - but few mid-market ones.

This, I suspect, has something to do with the Soprano tradition of that great city. It is not a place where foreign companies would want to flex their muscles without making sure they had local support - though a few, such as Ikea, have established a base. At any rate, not having that mass of familiar names gives Naples a quite different feel - a place run by locals not by multinationals.

There must be costs to this policy. Multinationals squeeze out the local stores partly because they can buy cheaper but also because they are very sensitive in displaying what we want to buy. No one forces people to shop at Tesco; they choose to do so. Indeed much of the improvement in the variety of the British diet has been thanks to the supermarkets and M&S.

We all know there is a downside, and we see that particularly in Britain in the sameness of our high streets. The question is, what is to be done?

The Cosa Nostra option is not on. Nor, if you think about it, is using planning controls to discriminate against the chains. The only way forward, surely, is to use education and technology.

Education is simply shouting that if people want to keep corner stores alive, they have to shop there. Technology means using the web and search engines to free ourselves of brand tyranny; if you can find other ways of guaranteeing quality then you don't need the brand name.

I found my hotel by using the favourable references of people who had stayed there. Also, thanks to booking over the web, I was assured that the price was fair. You could say they made me an offer I couldn't refuse...