There has been a significant improvement in sentiment toward the global economy in the first few months of this year, but even though this improvement can easily be explained it needs to be kept in context, as there are still considerable challenges ahead.

When considering the economic outlook, we must not lose sight of two key influences. The first is the shift in the 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 Middle East. This shift is a strong, positive driving force.

The second factor's influence is shorter-term, but negative. This is the overhang of debt that continues to weigh on the recovery in Europe and the United States. The need to deleverage - as people, firms and governments pay off debt - points to a steady but unspectacular recovery in the US, and signals further problems in the eurozone.

It is against this backdrop that one needs to view the recent improvement in financial-market sentiment across the globe.

At the end of last year, a number of factors were weighing on the global economy. Lest we forget, the markets feared a double-dip recession in the US, a hard landing in China and a collapse of the euro. Thankfully, none of these fears materialised. I did not share the markets' views about the US or China, but I was pessimistic about the euro, expecting a muddle-through. The fact that economic data from both the US and China was better than expected helped sentiment, but the key factor was the actions of the European Central Bank (ECB).

The ECB did a great job pulling the euro area back from the brink by providing cheap three-year money in both December and February, which averted a bank collapse and a credit crunch. But as profound and necessary as the ECB's actions were, the short-term relief it has provided should not be seen as a longer-term cure for Europe's problems.

This year, the world economy still faces significant challenges. Let me highlight the main ones.

The first is the euro. The eurozone is in recession. With the exception of France, most major euro 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 every likelihood that this contraction will have continued in the first quarter, and perhaps even through 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 eurozone is focusing on the wrong problem. Although debt levels are high, the biggest challenge is the lack of growth. Europe needs a growth strategy. It does not have one. Instead, it is cutting public spending and raising taxes to reduce debt. This is a long and painful process. Unless private spending picks up, economies will be weak. The trouble is, with demand sluggish, many firms are thinking twice about increasing their spending, which has resulted in a continuation of the difficulties that have engulfed the eurozone in recent years. This means further problems for Greece, and future worries for Spain, Portugal and Italy, as they will be in recession, probably this year and next.