Uncertainties In the New Year

The global economy is expected to grow by 2-3 percent in 2010, according to theYellow Book of International Economy for 2010released on December 24 by the Chinese Academy of Social Sciences (CASS).Zhang Yuyan, Editor in Chief of the yellow book and Director of the Institute of World Economics and Politics at CASS, offered his insights into uncertainties in the world economy in 2010 at the launching ceremony for the yellow book. Edited excerpts follow:

While recovery efforts take effect worldwide, and even with signs of improvement beginning to proliferate, uncertainties still exist for the world economy as it enters the new year.

At the forefront of concerns is the financial system. Although the global financial system has managed to pull itself out of the initial turmoil of the financial crisis, it is still relatively weak and fragile. The fact that the recent Dubai debt crisis and credit degradation of the Greek Government threw the world economy into such a panic only reinforces the notion of uncertainties surrounding the world financial system.

Now that counter-crisis policies from nations scattered across the globe have been stretched to their limits, policy uncertainties have also raised anxieties after large-scale stimulus and bailout measures almost weighed down the fiscal balance of each and every economy globally. The accumulated U.S. fiscal deficit now exceeds its GDP; Japan’s has done so for an extensive period of time. And as for monetary policies, almost all nations have lowered their interest rates to bare minimum levels.

Unemployment, a problem facing developed countries more so than developing countries, also poses a threat to the stability of the world economy. Japan’s unemployment rate stood at a record high of 5.1 percent in 2009, while the United States’ and European Union’s rates were closer to 10 percent. The latest report released by the U.S. Bureau of Labor Statistics created an even grimmer employment outlook: 55.1 percent of those unemployed fell into the category of permanent job separation and the average unemployment duration increased to 28.5 weeks.

While counting too much on investment—another uncertainty—as an impetus for economic growth, we have to pay even more attention to the sustainability of the investment surge. Currently, the equipment utilization ratio in the United States and Europe was much lower than before, which will definitely dampen new investments. What’s more, the U.S. domestic savings rate experienced a dramatic increase and average household net assets decreased by $130,000 to $150,000 in the wake of the financial crisis.

Also, amid the sweeping economic crisis, more and more countries have turned to trade protectionism to assist their own economies. We have witnessed an increasing number of protectionist cases that will only exert negative influences on global trade. In 2009, the world’s foreign direct investment is expected to decrease to about $1.2 trillion, much lower than the previous year’s $1.54 trillion.

Uncertainties concerning the green economy will also present new challenges to the world economy in 2010. Owing to high costs and investments, the green energy industry will not be capable of upholding the world economy on its own, especially since the world has yet to reach an agreement on the standardization of green energy and its application. We will be forced to wait until it becomes certain that green energy can provide a viable alternative to traditional energy sources currently in use.

The price of primary products and oil will present a final uncertainty, as the price of crude oil may range from $70 to as much as $100 a barrel. According to Morgan Stanley, its average price should stand at about $85.