What will be the general context for the economy in 2010?

Clearly, 2010 will be different from 2009. In 2009, we were initially on the brink of the abyss, and later on in the year there was some relief when we felt that the worst might be avoided. 2010 will rather be the year of “convalescence” for the global economy. The key questions will be more along the lines of “Is there a risk of sliding back into recession? What will be the long-term impact of the crisis?” Against this backdrop, we see two risks. First, we could see some flattening in growth in the second half of the year, due to the fact that the effects of the inventory cycle and the fiscal stimuli will recede. Second, the growth divergence between developed economies and emerging market economies, could be a source of financial instability, fuelling new “bubbles”, for instance in emerging markets or in commodity prices.

What are main challenges facing governments? The press talks a lot about employment and public debt.

The key word amongst policymakers, especially at G-20 level, is ‘exit strategy’. The G-20’s recommendation is first to revive growth and employment, and then consolidate public finance. But this is easier said than done, as there is significant execution risk: if you start consolidating public finance too late, there is a risk of seeing a sharp increase in long-term yields. On the other hand, if you start too early, you could kill the recovery. So there is a strong chance that governments will make mistakes.

Will we be able to say in 2010 that the crisis is behind us?

No, it would be wrong and misleading to say that. Clearly, the bottom of the cycle is behind us, but some long-term effects of the crisis are still to be felt. First, credit supply and demand will remain constrained, especially as banks, households and companies will still have to deleverage further. Note also that financial regulation will be tighten. In addition, governments will also have to cut their public debt, as I said before, which will be a long-term drag on growth. The bottom line that long-term potential growth for the world economy, especially in developed markets, will be slower than over the previous decade.