There are two key influences that impact global economic outlook this year. The first is the shift in balance of economic and financial power, highlighted by the emergence of China, India and Brazil — not to mention a host of other economies across Asia, Africa and the West Asia. This is a strong, positive driving force.

The overhang of debt that continues to weigh on the recovery in Europe and the US are the other factor. The need to de-leverage points to a steady but unspectacular recovery in the US, and signals further problems in the Euro area.

Sentiment booster

At the end of last year, a number of factors were weighing on the world economy. The fact that economic data from both the US and China was better than expected in the beginning of this year helped sentiment. The ECB also did a great job pulling the Euro area back from the brink by providing cheap three-year money in both December and February.

Challenges ahead

The euro area is in recession. With the exception of France, most major European economies contracted in the last three months of 2011. This included the peripheral Euro-area countries of Ireland, Italy, Spain, Portugal and Greece.

There is a strong likelihood of this contraction continuing in the first quarter, and perhaps even in the first half of this year. In short, the periphery is seeing a double-dip recession. The ECB's actions may have averted a credit crunch, but they will not prevent a credit squeeze where funds are still hard to come by.

Moreover, the Euro area is focusing on the wrong problem. Although debt levels are high, the bigger challenge is the lack of growth. Europe needs a growth strategy. Instead, it is cutting public spending and raising taxes to reduce debt.

Biggies hold key

Another challenge is the US. I am positive about America's long-term prospects. If growth in US has to be higher this year, it should be driven by big companies with strong balance sheets deciding to go out and invest. Instead, they seem reluctant, either because of fear of weak demand or regulatory outlook following this year's presidential election in November.

It would be pleasing if a rebound in confidence did allow corporate America to go on a spending spree. Yet, if it does not, then the backdrop for the average American will be one of only modest employment growth, a small rise in wages and a still-weak housing market. Americans still need to save more and spend less.

This leads to the issue of energy and food prices. A year ago, rising food and energy prices added to inflation pressures across the globe, justifying higher interest rates in many growing economies. Now, rising oil prices appear more like a tax on global growth, eating into spending power in the US and Europe, and hitting many Asian economies at a time when they are slowing. Rising oil prices are usually the biggest threat to continued global growth.

Crude conundrum

There can often be a big difference between oil prices driven higher by strong demand and by supply shocks. If strong demand is driving prices, then high oil prices result in increased spending and trade.

In the past, demand-driven spikes in oil prices would come late in an economic cycle. Now, it is demand from Asia and the West Asia that is driving oil prices up, and thus Western economies may not be in a strong position to cope. The more oil prices rise this year, the weaker the economic outlook will be in the West.

This vulnerability is worse now, as supply-side worries surrounding Iran have led to a large risk premium, pushing oil prices up. Oil prices appear to have a firm floor because of strong demand, and a soft ceiling because of geopolitics.

China watching

Over the past year, China's authorities have tightened policy in order to squeeze inflation. Their main focus appears to have been on property prices, yet they have also been keen not to see a wage-price spiral develop.

The Chinese authorities have handled things well. But the challenges are not getting any easier. China's economy is cooling, not collapsing, and it is having a soft, not a hard, landing.

At this year's National People's Congress, the Chinese Premier, Mr Wen Jiabao, sensibly cut the growth projection to 7.5 per cent from eight per cent. Although I remain positive about China's longer-term prospects, it is important to stress that, at some stage, China will have a setback.

This should be seen as a feature of China's likely development. As the economy grows bigger, it becomes harder to manage than in the past. Moreover, the need to switch from investment to consumption-led growth poses many challenges. As the Chinese economy cools, one should expect furtherpolicy easing that allows for a rebound later this year.

Crisis and growth

In the immediate aftermath of the financial crisis, the world economy contracted in 2009, its first fall since the Second World War. In 2010, there was a strong rebound, with the world economy growing 4.4 per cent, But in 2011, the pace of growth slowed as the policy stimulus in the West started to wear off and as more economies in Asia and Latin America raised interest rates to curb inflation. Last year, the world economy grew by three per cent.

This year, the good news is that there will be growth, but it might not be any higher than it was in 2011. Europe faces further challenges. America still has a debt mountain to climb. And many emerging economies have been slowing in the early months of the year. The economic story is one of a fragile West and a resilient East.

(The author is Chief Economist at Standard Chartered Bank. The views are personal)

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