It depends on two crucial questions: the effect of tighter monetary policy in the US and whether the Chinese real estate slowdown reverses or accelerates

Since the end of August, the American 10-year treasury yields have risen 11% to 2.60% from 2.33% last Friday. All of this is based on the strength of the US economy. The US had a difficult start to the year but the last estimate projected a very healthy 4% increase on gross domestic product (GDP). The third quantitative easing program (QE3) is scheduled to end next month. The question is when will the US central bank, the Federal Reserve (Fed), raise interest rates?

The consensus estimate has been next summer, but with the American economy rolling along it might be earlier. Up to now the Fed has indicated that it intends to keep interest rates low for a “considerable time”. Many governors of the Fed, both hawks and doves, have been advocating taking out those words. They feel the US economy is now strong enough to do without life support. So there are no worries about the world’s largest economy, but what about the others? Are they getting stronger as well?

Some analysts think so. The strategists at Black Rock, the world’s largest funds managers, cite the global Purchasing Managers Index (PMI), which has been stable at 52.5 for most of the year. This indicates a modest expansion. The global services PMI has done even better. They also reference two other indicators. Tight credit spreads are an indication of stronger credit conditions that usually coincide with faster growth. Widening credit spreads indicate worsening credit conditions and slower growth. Credit spreads are generally pretty tight which should be encouraging. Third, prices for basic industrial metals have been stable. Falling prices would mean a slowdown. Instead they have rebounded from lows earlier in the year.

But there are others who are not so sure. The International Monetary Fund (IMF) predicted that global growth would average 3.4% this year. Their chief, Christine Legarde, recently stated that the forecast might be slightly lower in the next official forecast due in October.

While the US seems fine, there are other parts of the world that are having real problems that are likely to continue. Italy’s economy, which hasn’t really recovered from the recession, contracted for the first time in 14 months. The French manufacturing sector shrank for a fourth consecutive month and its economy is stagnant. But that is better than Europe’s power house, Germany, whose economy contracted in August and September. Its manufacturing hit an 11-month low.

Price inflation to July in Europe was a mere 0.4%. This was small enough to encourage the European Central Bank (ECB) to start a new stimulus program. The program involves the ECB purchasing Asset Backed Securities or ABS. The problem is that there aren’t enough of them to make a large difference. The ECB also asked the member companies for guarantees for ABSs of lesser quality. The countries refused. So it looks like this program, dubbed QE lite, will basically be going nowhere.

Europe is also weighed down by the sanctions against Russia for its invasion of Ukraine. These sanctions have been especially difficult for Germany since Russia is its 11th largest trading partner after Japan.

Japan has not had similar difficulties with its massive QE program. The Bank of Japan can buy as many Japanese Government Bonds (JGBs) as it wishes. However, the massive stimulus has had about the same effect as the QE lite in Europe.

The Japanese debt is the highest in the world for developed countries at 243%. To bring this down the Japanese increased their national sales tax from 5% to 8%. The reaction was swift. The GDP fell in both August and September. The September contraction was at an annualized rate of -7.1%. A fall was expected, but not a crash.

No doubt the Japanese response will be more “Abenomics”; purchases of more JGBs by the Bank of Japan and a promise of more fiscal stimulus. But the impact of this program on ordinary Japanese citizens has been less than salutary. The debased currency is making imports, mostly fuel, more expensive, which is increasing inflation. Inflation, together with higher taxes, has impacted on real household income. It has fallen by an average of 6% since April. So, the political support for Prime Minister Abe and his program is waning.

Like the developed countries, emerging markets seem to be on two separate paths. Consensus for Brazil’s GDP growth has fallen for the 15th consecutive week. It went negative in August down at a -0.9% annual rate. South Africa is still positive. It grew at an annualized rate of 1.0% in August, but that was down from 1.6% in May. For the emerging markets as a whole, excluding China, the forecast growth is 2.1% far below pre crisis levels and comparable to developed countries.

The economies of both Russia and Argentina are forecast to contract. Issues of both these countries are due to almost unbelievable government mismanagement. Turkey has also been subject to political issues, but it also has nasty neighbours. The upheavals in Russia and Iraq are having a detrimental effect on its economy. Its growth went negative in the most recent quarter. On an annual basis growth has declined from 4% in the spring to 2% by the latest figures.

The two stars of the emerging markets are Indonesia and India. The question concerning Indonesia is, of course, China. China is experiencing a real estate slow down. Like the US subprime crisis a real estate slow down in China could easily metastasize into a full blown recession or worse for three reasons. First, real estate and other industries make up 20% of the Chinese economy, far more than in the US and other countries. Second, real estate received much of its financing from the shadow banking system. The combination of asymmetry of maturities and high interest rates could be ruinous. Finally, real estate or more specifically land sales make up 60% of heavily indebted local government income.

If real estate prices continue to fall in China, it will reverberate to all of its many trading partners. These include many commodities countries like Indonesia, Brazil and even Canada. Perhaps only India with its limited dependence on exports is immune to problems from China.

Will growth in North America and India be sufficient to revitalize the rest of the world? Perhaps. But it depends on two crucial questions. What will be the effect of tighter monetary policy in the US? And whether the Chinese real estate slowdown reverses or accelerates? It may be a bumpy fall.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)