Another challenge is the US. If there is to be a pleasant surprise this year, with US growth being much higher, it will be because big companies whose balance sheets are in good shape decided to go out and invest. Yet they seem reluctant, either because they fear demand will be weak or because they are worried about the regulatory outlook following this year's presidential election in November.

Confidence, of course, is an impossible thing to predict. 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 will 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.

The impact of oil prices on the global economy can never be underestimated. Rising oil prices are usually the biggest threat to continued global growth.

There can often be a big difference between oil prices being driven higher by strong demand and by supply shocks. If strong demand is driving prices, then at least when oil prices rise, there is also 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 Middle East 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.

It is not just the West that watches oil prices closely. So, too, does China. 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.

As has so often been the case in recent years, 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, Premier Wen Jiabao sensibly cut the growth projection to 7.5 percent from 8 percent. Although I remain positive about China's long-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.

Thankfully, China has enough policy room in which to manoeuvre in to cope with any setback, and that a setback seems unlikely to occur this year. As the Chinese economy cools, one should expect further gradual policy easing that allows for a rebound later this year.

Over all, this should prove to be another challenging and interesting year for the world economy. In the immediate aftermath of the financial crisis, for the first time since World War II, the world economy contracted in 2009.

In 2010, there was a strong rebound, with the world economy growing 4.4 percent, led by policy stimulus in the West, and by the strength of China and the emerging economies. 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.

This year, the good news is there will be growth, but it will be difficult for it to be any more than it was in 2011, because Europe faces further challenges, the US 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.

(China Daily 03/20/2012 page9)