The Great Recession gripped the richer world and had knock-on effects on the rest of the developing world resulting in world economy contracting by 1.5 per cent and trade flows shrinking by 12 per cent in 2009. Even if recession, the longest and deepest, in USA may have ended in the fourth quarter, the world economy as a whole is projected to go through a phase of slow and uneven recovery beginning 2010, which would hardly make any dent on unemployment at peak levels, such as 10 per cent in United States.

The global crisis, originating with turmoils in financial markets in late 2008, exploded the myths of the market-place. In the greatest public intervention, Governments and central banks around the world acting collectively injected trillions of dollars to bail out failing financial firms to avert a collapse and rescue the economy from the brink. While Governments provided massive fiscal stimulus to create demand, central banks maintained close to zero interest rates and enlarged their balance sheets to lend and guarantee loans. US, European Union and Japan appeared to be emerging out of recession by the end of 2009. They now face, along with leading developing economies, challenges of restoring fiscal balances, bringing down the unsustainable debt-GDP ratios, and refashioning growth of the world economy on a strong and sustained basis. However, IMF which has forecast a three percent growth for the world economy in 2010, has cautioned against any premature withdrawal of stimulus before recovery takes a firm hold.

Asia, the economic power-house for the 21st century, driven largely by China, staged a smart recovery in the latter half of 2009 and helped to moderate the global slump. But Asia, mostly export-led, is now required to rebalance its growth patterns to focus more on domestic consumption as the richer world are not likely to generate the level of demand as hitherto. There is a collective commitment among major economies in G-20 to work for strong, sustainable and balanced growth of the world economy which would also aim at narrowing the existing global imbalances. The world is now clearly shifting toward a new economic model where financial firms would be strictly regulated to prevent recurrence of crises of the type just endured.

President Barack Obama is laying emphasis on a restructuring of the American economy which would be rid of boom-bust cycles and where the citizens save more rather than indulge in debt-fuelled consumption patterns. USA can no longer be the consumer of last resort, he has told the world. President Obama promoted the 787 billion dollar economic recovery and reinvestment which his administration contends has saved the economy from free fall though it is still to generate significant numbers of jobs created or saved, as envisaged. Over seven million jobs have been lost since the onset of recession in December 2007 though in recent months, the pace of job losses has sharply declined. The President has proposed additional spending with incentives for small businesses to hire more workers and for job-creating infrastructure projects awaiting Congressional action early in the new year.

A number of major banks bailed out by the Federal Government have improved their finances to make repayments which are expected to total around 200 billion by the end of 2010. But credit flows in general, and for smaller businesses in particular, are still restrained thus thwarting post-recession recovery and new hirings. US Congress is expected to enact Financial Sector Regulatory Reform in 2010 with sweeping changes proposed by the Administration for tighter regulation of capital markets including government powers over large banks with global connections. President Obama has run into unexpected difficulties with his reform agenda and bringing an early end to the war in Afghanistan. But his highest domestic priority of health care reform extending coverage to over 30 million uninsured is about to be accomplished in his first year in office when the two versions of the landmark reform measure of the House and the Senate are reconciled when the Congress reassembles in January. Private insurers would come under greater regulation to protect the interests of the consumer.

2010 is also expected to see Congress enact a new Energy and Climate Change law providing for a cut in greenhouse gas emissions by 17-20 per cent over 2005 levels by 2020 - which would be less than 4 per cent over 1990 levels under the Kyoto Protocol to which USA had entered reservations. But President Obama, who succeeded in forging the Copenhagen Accord - an informal deal of major emitting powers - would have to make more credible moves in terms of the UN Framework and the Bali Action Plan if USA has to play a leading role in tackling global warming with China, currently the largest polluter, and other developing nations.

Despite mixed signals from the data on output and the housing market and consumer spending, there is confidence that US economy is gaining some momentum which could get reflected in the fourth quarter data after a modest 2.2 per cent recovery in the third quarter (July-September). IMF estimates in October were that US economy would grow by 1.5 per cent in 2010 but US Federal Reserve expects growth would be closer to 2.5 to 3 per cent. The Fed decided in mid-December to maintain the Federal funds rate at exceptionally low levels of 0 to 0.25 per cent for an extended period. It is, however, slowly winding up its guarantees though inflation outlook is subdued at present.

Relatively European recovery would be weaker with growth at present projected at 0.3 per cent for the eurozone. Countries in Europe would recover from the global economic crisis at varying speeds during 2010, with the jobs market only picking up gradually, according to IMF. The year 2010 will be dominated by the challenge of how to strike a balance between continuing to support the economy and gradually phasing out unconventional measures. Stating that the banking sector in Europe is not in good shape, IMF says, national authorities need to ensure that banks keep capital up to deal with the loan losses ahead and be in a position to extend credit. Weak banks should be required to raise capital and restructure or face resolution.

Despite high unemployment levels across Europe, a turnaround in the labour market is unlikely to happen before business activity has vigorously recovered, probably late in 2010 or into 2011.

Trade and exchange rate frictions may aggravate in 2010 between the United States and China, which has probably overtaken Germany as the largest exporter in 2009. China, which is a leading creditor to USA, has rejected American demand to let its “undervalued” currency appreciate to help in reducing global imbalances. Though China's huge export machine took the hit from the global crisis and weakening of external demand, it managed to maintain competitiveness of its exports and minimise the adverse impact of global trade contraction. On January 1, the China-Asean Free Trade Area will be ushered in to promote greater two-way trade flows which had risen to 192 billion dollars in 2008. But manufacturers in South East Asia are also nervous about retaining their market share as cheaper Chinese goods may flood the markets with the fall in tariffs.

With its massive stimulus to support domestic demand, China recovered fast and was able to raise its output with every quarter. It will achieve its targeted 8 per cent for this year and aims at a higher growth in 2010. Premier Wen Jiabao has said in a end-of-year interview that China stabilised its economy and employment levels and maintained social stability. In 2010, Government is set to continue its “pro-active fiscal policy and moderately lose monetary policy” to maintain stable but rapid growth. (IPA Service)