LOBAL affairs and their significance to the island were thrust into the limelight last night, the topic of a presentation by economist and Bermuda College lecturer Craig Simmons.

Mr. Simmons spoke at the annual meeting of the Friends of the College Library, delivering his views on the topic "Major Issues in the World Economy and their Implications for Bermuda".

Prior to the event, however, he shared a few thoughts with the .

"Since 2001 there has been steady growth in the world economy," he said. "The normal rate of growth in the world economy is around about four per cent. Last year, (it) was about 3.9 per cent. This year it's predicted to rise as far as five.

"Next year it should drop off a little bit. So these recent figures suggest things are going rather well. Bermuda, on the other hand, can't expect those kinds of growth. For Bermuda, a normal rate of growth would be a sub-three per cent increase ? which was the case, in fact, last year."

Industrial production, consumer and business spending and a stable labour market all contributed to global growth, Mr. Simmons added.

"The industrial production I talked about is being boosted by US labour productivity. The US economy is growing, largely because of increasing labour productivity, which in turn is increasing income, which in turn increases consumption.

"As we've noted a decline in the power of unions, there's a lot more outsourcing and greater capital ability in the sense that people are able to set up businesses more easily in other countries. China seems to be one of the favourites."

One of the reasons China was increasing in popularity was because of "significant institutional change" regarding its property rights law, Mr. Simmons said.

"As a result, foreign firms are more willing to set up shop in China. There's been a significant increase in direct foreign investment. That, in turn, has meant more physical capital and more productivity and most of that additional productivity is exported."

He said a similar scenario is being played out in India, now a favourite for information technology companies looking to outsource their services.

"India as well as China has grown significantly. I think China's growth last year was nine per cent. India was a bit smaller, about 6? per cent. So those two countries are responsible for quite a bit of global growth."

The world picture is not entirely rosy, however. The knock-on effect of the growth in China and India is an increased demand for oil.

"On the negative side, we've got oil prices rising. The reason for the rise seems to be from the demand side. It's increasing faster now than it has over the last 25 years, primarily because of the Chinese appetite for oil and the Indian appetite for oil in order to produce these additional industrial products. What's driving oil prices right now is very different from what we observed 20 years ago, when there were supply side issues."

The direct impact of the rising oil prices ? from $26 a barrel a year ago to nearly $50 today ? is a retardation of global growth. "It's estimated that for every $5 increase in the price of oil, global growth is slowed by approximately 0.3 of a percentage point. That is significant in that it's an effect that isn't felt for about a year."

The high cost of real estate in Bermuda was only mirroring that in other jurisdictions. Closely linked with consumer spending, it was a further contributor to global growth, Mr. Simmons added.

"Growing disposable incomes would help explain why consumers, globally, are spending more. But more importantly, there's (a theory) called The Wealth Effect, based on the observed house price inflation.

"It's not only a situation in Bermuda. In Australia, Ireland, Holland, Hong Kong, Spain, the US and the UK, house prices have been increasing in excess of 50 per cent since the late '90s."

It was that increase, Mr. Simmons said, which had encouraged spending.

"Needless to say, the main asset of households in industrialised countries is housing and the main liability is a mortgage. Those increases make home owners feel wealthier and so they increase their spending.

"Housing prices are rising, boosting wealth, and in turn, consumption. Low interest rates are making mortgages cheaper. The long and short of it is is that these increases in the price of housing are allowing households to borrow and spend more. It's almost a self-fulfilling prophecy.

"What happens is as housing becomes valuable, people's wealth increases, as their wealth increases they consume more. Those additional rounds of spending boost Gross Domestic Product (GDP) which in turn boosts housing prices, which in turn boosts wealth, which in turn boosts consumption. So it's sort of a scary situation.

"Global housing tends to mirror global GDP. As the global economy's growing, we note house prices increasing and the converse is also true. This seems to be more important than any local factors. So it's really the global environment that's inflating house prices."

Driving the increasing house prices is the US Federal Reserve, the economist added.

"Unfortunately, the US market starts all this off which would suggest that the Federal Reserve has a strong hand in determining housing market conditions. We anticipate the Federal Reserve increasing interest rates over the next while, that will create a risk of bursting the housing bubble.

"So (it's) a challenge for the Federal Reserve, and also for banks ? to minimise the risk and of course, to keep inflation under wraps which is the reason why interest rates would be rising in the first place."

Mr. Simmons added that whether the Federal Reserve and banks were successful in meeting that challenge should be of interest to residents ? where interest rates were concerned, Bermuda's monetary policy was that of the Federal Reserve.

"So if the Federal Reserve's rates change, Bermuda mirrors those rates. In other jurisdictions, in larger trading blocks like the European Union, there is some sort of independence but still I think they will take their lead from whatever the Federal Reserve does. So we should also expect interest rates to nudge up a bit in Europe as well."