There are some grounds for optimism in the forthcoming year. Hopefully, the corner has been turned. But, nevertheless there are still many serious problems facing economies around the world.
China has a policy of artificially keeping the Yuan undervalued. It does this through exchange controls and purchasing large sums of dollar assets. This weak Chinese Yuan is good for Chinese exporters, but, it creates disequilibrium in the world economy. It leads to a large trade surplus for China and a deficit for the US. The weak Yuan harms global demand, especially in the US. If the Yuan appreciated to its natural level, Chinese consumers could buy more imports and US companies would have greater competitiveness in selling to China.
Paul Krugman estimates the undervalued Yuan could cost the US 1.3 million jobs in 2010. (macro effects of Chinese mercantilism)
Also, this undervalued Yuan is a form of 'beggar thy neighbour' protectionism. It leads to retaliation in the form of protectionism against Chinese imports.
Weakness of Domestic Growth
Past growth was based on rising asset prices (especially housing) and a credit bubble. Neither of these is likely to return. Consumers are much more reluctant to spend, we are entering a new era of frugality with higher saving ratios. This has definite benefits but makes a recovery to normal growth more difficult.
The global economy has suffered its worst years since the great depression of the 1930s. A small improvement in growth could cause a premature celebration of recovery - leading to the removal of expansionary fiscal and monetary policy which could cause a double dip recession.
The precipitous falls in economic outpur has compounded structural deficits leaving many countries facing record peace-time debt levels. Already some countries like Greece have already had rating downgrades. Others like the UK and Ireland have been threatened with rating downgrades. The need to offer concrete plans to reduce borrowing makes it a difficult balancing act for maintaining economic recovery.
Many banks and financial institutions are still nursing large losses from the credit crunch. It will take time for banks to improve their balance sheets. The prospect of further falls in house prices could still undermine banks fragile bank balance sheets.
Whilst the fundamental problem is still spare capacity and unemployment, evidence suggest commodity prices are already rising due to strong Chinese and Indian demand. Rising oil prices could cause a return of cost push inflation we saw at the start of 2008. This could complicate Monetary policy which is trying to boost growth.