Never before have emerging economies been in such a good position to sustain demand during a global downturn. Never before, too, has this been more important for the whole world. But the fact that a line of action is feasible and desirable does not mean it will happen. Optimists believe the emerging economies have decoupled at last. But such optimism may yet prove unhinged.

The cheerful view rests on two propositions: first, the slowdown in US demand will be quite mild; and, second, emerging market economies - and particularly the largest among them - are strong enough to respond effectively. As a result, the world is going to see a passing of the demand baton from the US and, so, benign adjustment of "global imbalances".

On the prospects for the US, the September issue of Consensus Economics was optimistic: 2 per cent growth this year, followed by a recovery to 2.4 per cent in 2008. Goldman Sachs forecasts 1.8 per cent growth next year. But this pessimism is not universal: JPMorgan forecasts 2.6 per cent in 2008.

The big point is that prospects have become uncertain: the impact of the credit freeze may be mild, but may also be severe. US policymakers do, however, have room for manoeuvre: lower interest rates and even a fiscal boost would follow economic weakness.

Now turn to the emerging economies. Singapore-based DBS group notes that Asian growth has recently been accelerating while US growth has been weak. Furthermore, adds Goldman Sachs, emerging markets are far more resilient to external shocks than ever before. This view is shared in the markets: look at the buoyancy of emerging market equities and the modest widening in spreads on emerging market bonds, despite recent shocks to the credit markets of the US and other high-income countries.

The evidence on emerging market resilience is impressive: external debt has fallen sharply as a share of aggregate gross domestic product; many of these countries have been running current account surpluses and have, as a result, accumulated vast foreign currency reserves; even Latin America has become a net creditor; inflation has fallen to low levels, despite the recent surge in prices of commodities, including oil; and the proportion of non-performing loans in lending by banks based in a large sample of emerging economies has, says Goldman Sachs, fallen to just 5.8 per cent in 2006, down from 13 per cent in 2002 (see charts).

For the first time, emerging markets are a safe haven during a global financial shock emanating from the world's hegemonic economic power. How times have changed and how have the mighty fallen!

Ironically, today's financial strength in emerging economies is a mirror image of US weakness. Charles Dumas of London-based Lombard Street Research brings this point out in an analysis with which I have great sympathy.* The global balance of payments sums to zero. If emerging economies have chosen to run huge current account surpluses, partly because they bear deep scars from the financial crises of the 1990s and partly because they wish to conserve revenue from the soaring prices of the commodities many of them export, then someone else must run deficits.

In the 2000s, that someone has largely been the US. This has entailed fast growth of domestic debt and debt service, chiefly among households. Falling house prices and the "subprime" debacle have now derailed this debt-accumulation machine.

The good news, then, is that what has made the US vulnerable is also precisely what has made it easier for emerging market economies to cope with a US-generated shock. True, this is not the case for all emerging economies: Turkey and several central European countries (Hungary, for example) have large current account deficits and so are in no position to expand demand. These economies are, accordingly, vulnerable to shifts in external credit. But such constraints are now relatively rare among significant emerging economies. 

The bad news, however, is that the emerging market economies will indeed have to adjust, probably aggressively. It seems unlikely that growth of demand will now accelerate in western Europe and Japan. The opposite is, alas, more likely. More important is the fact that China's surging current account surplus, forecast by the World Bank to reach $380bn this year, up from $250bn in 2006, is extracting demand from the rest of the world to the tune of .75 per cent of the latter's aggregate GDP. China's forecast surplus - an amazing 12 per cent of GDP - is twice as big, relative to GDP, as Japan's has ever been.

The analytical point is that offsetting any slowdown in US demand requires faster growth of demand in the rest of the world. This is still more true if, as seems quite likely (and also desirable), US demand growth slows, relative to growth of GDP, and so the US current account deficit shrinks further.

In that case, the rest of the world's demand must rise relative to its output and, ideally, must grow faster than potential output, to ensure full employment of resources. But that is exactly the opposite of what China - vastly the most important of emerging market economies - is now doing.

The conclusion, then, is simple and disturbing. Yes, emerging economies are, with a few exceptions, in a better position to offset a US slowdown and tightening of global credit conditions than ever before. But they are almost certainly going to have to do just that.

The difficulty they face, however, is that neither western Europe as a whole, nor Japan, nor, not least, the giant among them, is likely to help the rest very much. China, in particular, is now exporting a big net contraction, not expansion, in demand to the rest of its world, because its supply is growing far faster than its domestic demand. The difference this year alone is 2.5 per cent of GDP. If US demand slowed substantially and China, Japan and western Europe remained on their present courses, the world economy would surely slow far more than the optimists now hope.

What matters at such times is changes in demand relative to supply. From this point of view, China's current mix is a disaster. Rebalancing towards stronger domestic demand and a smaller current account surplus has long been domestically desirable. In an era of weaker US demand, it has become a global necessity. China is about to have economic leadership thrust upon it. What happens now will depend heavily on how the Asian giant responds to this great challenge.

*The bill from the China shop is arriving, Monthly Review, September 2007, www.lombardstreetresearch.com