The last 24 hours have seen a number of important developments. Developments with the US, Japan, China and in Europe: developments with sterling - which has fallen to its lowest level against the dollar since the end of 2006, and the continuous fall in the price of oil and other commodities. It seems possible that as the credit crunch passes its first birthday, we are seeing stage two in this saga unfold; maybe the world is re-aligning.

It all started with China. Emerging economies are supposed to grow through borrowing. That's how it has always been. It happened with the US in the late 19th century, it happened with Japan and it happened with the Tiger economies of Asia in the 1990s. But with China it was different. Not only has China enjoyed an extraordinary period of double-digit growth, it has done so while amassing huge foreign exchange reserves - it has done so while its citizens save at a rate far in excess of the saving ratios in the most frugal of developed economies, and rather than expanding by borrowing from abroad, China has lent money to foreigners so that they could then buy its products.

And many of the world's developed countries obliged, the US and UK especially. As a result, debt grew and grew in some countries while spare savings just ballooned in China and oil-producing states.

Maybe that is why we really have a credit crunch today. Anglo Saxon borrowings were no more sustainable than third world borrowing in previous decades. So it was clear that countries such as the UK and US had to cut back, rein in their spending. In an ideal world, consumers would have stopped their borrowing of their own volition, but unfortunately it has taken a credit crunch instead. And that has been the story of the last year, the credit crunch has really been a manifestation of something many thought was inevitable anyway, a change in the way the UK and US did things.

Yesterday saw the latest in a long line of evidence to suggest the US is changing. In June US exports rose by a massive 4 per cent on the previous month, while non oil imports dropped by 1.4 per cent in June. The falling dollar has inevitably ceded an advantage to US exporters - while US consumers are buying less from abroad.

As the recent tax credit handed out to US householders slowly trickles out of the system, expect even bigger falls in US imports in future months.

Yet while the US consumer cuts back, the Chinese consumer at last goes out and spends. July saw the fastest rate of expansion in Chinese retailer sales in nine years, with sales up a stunning 23.3 per cent. At the same time, data revealed urban disposable income increased by 14.4 per cent in the first half of this year, and that is after allowing for inflation. Meanwhile, there has been good news on Chinese inflation, which fell to 6.3 per cent in July, the lowest level since September last year.

And so it appears China is at last placing more emphasis on its consumer. It has to, there is no gas left in the US tank, it can no longer expand though importing to countries which are getting further and further into debt.

This is how it is supposed to be; it is called decoupling, that's the idea that the world is no longer over-reliant on the US.

Yet a dark cloud is on China's horizon.

A number of commentators have drawn comparisons with the current Olympics and the Olympics in Seoul 20 years ago, and Mexico 40 years ago. In both those earlier examples the economies had been through a dramatic growth spurt - but both economies then saw a sharp slowdown when the Olympics ended.

The Olympics are of course hugely expensive - and there are plenty of examples of economies struggling for years while the bill for hosting the games is paid. But for developing economies, this is especially expensive.

For China, there has been the added cost of closing down factories in Beijing during the Olympic fortnight.

But then again, the Chinese government has plenty of money - it can afford the games. The closure of factories for two weeks may not, in the scheme of things, prove that disastrous - maybe Chinese workers need a holiday - we all feel better and newly rejuvenated after a break, after all.

It also seems we often attach too much importance to apparent patterns. Just because Korea and Mexico experienced a severe economic slowdown after the Olympics it does not mean China will. Any scientific test based on a sample of two would be considered totally meaningless. Yet, just because two developing economies suffered after the Olympics we are expected to believe this proves it will always be like this.

And yet, can China really change the way it grows? Just about every major corporation in the world that is in a position to invest in China has already done so. It is clear that the economic model that has served China so well for the last few years is no longer tenable.

The model needs to change - and there is no guarantee this new approach, an un-tested model focused on Chinese consumers, can work.

So, China needs to change gradually. Gradual change from an economy reliant on overseas consumers to one reliant on domestic markets - and in the meantime it still needs overseas trade.

The rest of the world, of course, needs Chinese consumers. We all need to sell more goods to China.

And yet, while oil has fallen in price, it is still clearly too high. At current prices, trade is expensive. We keep hearing that now is the time to buy locally. They say it is because the cost of food is too expensive, so we need local produce. But this argument has no economic foundations to it at all. Since when has the solution to higher prices been less trade?

The real reason why there is a rise in the supply of products to local markets from indigenous producers has been the high cost of fuel. This is likely to exert even bigger problems as time goes on, and will present a massive problem to China over the next few years.

So, the US and UK slow, and the call goes out for more exports from the countries where consumers have run out of breath.

That is the real reason why the dollar has been falling. It is the real reason for falling sterling too.

But then, the last few weeks have seen evidence that the rest of the world really can't afford to see US consumers spend less while the impact of the high price of oil is really being felt.

And then yesterday and this morning news broke that two of the world's largest economies, economies Americans and Brits are supposed to be selling to, could be going off the rails. To find out more, read the next article.

©2008 Investment and Business News. All Rights Reserved.

The Japanese economy contracted in the second quarter of this year, it’s official. The French economy may have contracted. If things don't improve in the third quarter, then both economies will have experienced recession.

For the economy of the Rising Sun, GDP contracted by 0.6 per cent in the quarter, compared to the previous three-month period. Annual growth was 1 per cent.

It appears the Japanese consumer was the main the main culprit. Consumer spending contracted by 0.3 per cent. In Japan, just like everywhere else, affordability is being stretched. And in Japan, just like everywhere else, fears on jobs are so great that wages are not rising in tandem. As we have argued here many times, rising prices when wages are not moving up, could well be deflationary in the longer-term. (Consider how Mrs Thatcher fought inflation by upping VAT.)

But there is hope lurking in the Japanese figures. Another major contributor to the contraction was a one-off. Public spending reduced by 0.2 per cent. Capital economics reckons: "this may partly reflect a temporary halt to road building owing to a dispute over tolls." The Japanese government though is planning a fiscal stimulus, so this will help in the next quarter. Taking this into account, Capital Economics was pretty sanguine about Japan. It said: "… is important to view the
fall in GDP in Q2 alongside the unsustainable strength in the previous two quarters and, above all, in the context of the surge in headline inflation. With global commodity prices now tumbling, this bad news is largely old news. The bigger picture is that the economy is still in relatively good shape compared to similar points in previous downturns. Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies, and is well-placed to benefit from the relative resilience of the rest of Asia including China."

Yet, there is a fear. Japan's net exports were flat in the quarter, they neither rose nor fell. This was a surprise, most economists had expected them to contract. As the US tax credit stops exerting an effect on US consumer spending, it seems there is good reason to believe Japanese exports will fall in the next quarter.

Twenty per cent of Japan’s exports go to the US, 15.4 per cent to China. So ultimately, Japan's economic story for the rest of this year depends on whether the effect of the rise in Chinese consumer spending can make up for the fall in US spending.

As for France, recent data suggests France has been flirting with recession. June saw a 0.4 per cent fall in industrial production, taking the annual figure to a contraction of 1.6 per cent. Industrial production is an important part of the French economy - accounting for around 20 per cent of GDP, so that is a nasty blow for the French economy.

Meanwhile, the French consumer seems to be battening down the hatches. French consumer confidence is at a record low, French inflation is on the up, and French house prices seem vulnerable.

Capital Economics has predicted a 10 per cent fall in French house prices, and reckons the growth in French consumer spending will fall markedly.

But there is good news. For one thing, the government is boosting the economy with a 9bn euro tax boost, and while it is thought consumer spending growth will slow, it is still expected to remain positive.

France accounts for just under 8 per cent of Britain's exports - so as long as French consumers increase spending while the pound stays weak against the euro, there is hope for at least some kind of export growth from the US to that country.

©2008 Investment and Business News. All Rights Reserved.

So the world re-aligns. The US and UK see the consequences of all those years of borrowing. And the rest of the world look on, and thank their lucky stars their own economies were based on producing things. But all of a sudden, it looks different. France joins Germany, Italy and Spain in the recession-fears club; Japan stutters; China changes; and we wait and see whether the recent trend seen of falling oil prices continues, and if it does continue, what this means for Russia.

And as all this happens, the dollar turns from being yesterday’s whipping boy, to the big buying opportunity.

The dollar is now at its highest price relative to the euro since February; relative to sterling it is at its highest price since November 2006. And the change really is like clockwork.

If you believe that the UK economy lags around 18 months behind the US, then the timing is about right - maybe a touch late, but the right ballpark.

In some ways the recent falls in the dollar against sterling seemed a touch odd. After all, the UK has suffered from similar problems to the US - massive current account deficit, over-indebted consumers. It is just that the US suffered first.

But what we are really seeing now, though, is something quite curious.

The dollar has fallen because the US economy needs to export its way out of trouble. This has gone into reverse, partially because the rest of the world can't afford to let the US export its way out of trouble.

So, if the dollar continues to rise, US exports will fall, and the US economy will weaken again.

The world needs to see two things happen. It needs to see oil, food and other commodities fall in price - and it needs to see the Chinese consumer continue to spend more. If neither of these things happens, then it is difficult to see how the current economic crisis can improve any time soon.

©2008 Investment and Business News. All Rights Reserved.

And through all the upheavals, Tesco continues its march towards overseas expansion. “Every little helps,” they say. Well, in the UK the stores are still booming, although evidence is growing to suggest customers are finding “every little helps” even more if they shop at discount stores such as Aldi.

Meanwhile, in the US, and now India, it seems customers are set to find out exactly how much “every little” really does help.

In the US its Fresh and Easy stores hit a hiccup earlier this year, with evidence that US shoppers preferred service over price, but when you think about it, local stores with cheap products could be just what the US consumer wants right now. If they want to cut back on gas, and just drive a few blocks away, then in this new era when Americans care about the cost of fuel, Fresh and Easy stores on their doorstep could be perfect.

But now Tesco turns its attention to India.

But there is a snag with India. Overseas supermarket chains are not allowed to set up retail stores in India. So, to get around that, they find partners.

And Tesco's partner is a big one - Indian giant Tata.

The plan is for Tesco to set up cash and carry stores - to supply Tata's Star Bazaar hypermarkets.

So Tata rolls out its plan to capture India’s consumers, Tesco provides the backbone.

In all, Tesco is planning a £60m investment at this stage, with cash and carry stores in Mumbai, Delhi and Bangalore.

But this is just the beginning. The potential market is huge, and Tata could prove to be a brilliant choice of partner.

Sir Terry Leahy, boss at Tesco, said: “Our wholesale cash-and-carry format will bring improved value, range and service to thousands of Indian businesses,” and he said it provides the company with “access to another of the most important economies in the world.”

©2008 Investment and Business News. All Rights Reserved.