The worst recession since the Great Depression of the 1930s was somewhat mild, with the United States, the epicentre of the crisis, and other crisis-hit economies, including those in Europe and Asia, weathering the perfect storm surprisingly well.

This may mean that either the pundits were wrong about the intensity of the unfolding crisis based on their understanding of the root causes, or that they were trumped by policymakers with timely policy interventions.

One could argue either case, but the real issue is not whether the prophets of doom were wrong or the policymakers right, but whether the world economy is back on track or still ailing. There is nothing in the macroeconomic data to suggest the crisis is really over. In fact, macro numbers show that the world economy is still sick, although it is out of intensive care.

The U.S. economy returned to positive growth in the third quarter of last year, while Germany, France, South Korea and Japan were able to exit earlier, in the second.

A few other economies, including Singapore, followed suit in the third quarter, while some others, including Malaysia, are likely to have emerged from recession in the fourth.

Likewise, the non-recession economies of China, India, Indonesia and Vietnam garnered better than expected growth in the second half of last year.

International organisations like the World Bank, International Monetary Fund and the Asian Development Bank are all revising their 2010 forecasts upward for most economies, but there are enough reasons to worry that all is not well and that the situation can go awry, somewhat in accordance with Murphy’s Law: ‘If things can go wrong, they will.’

For starters, the global imbalances that led to the crisis remain, with hardly any sign of rebalancing. East Asian economies continue to register substantial current account surpluses and are building up foreign exchange reserves despite falling exports. Nor has there been any let-up in the growth of savings in these surplus economies.

This is not to ignore adjustments occurring in the US economy. Savings there have gone up from two per cent to six per cent of gross national income (GNP), while the current account deficit has fallen from six per cent to five per cent of GDP, but these changes are not big enough to bring about rebalancing.

The exchange rate mechanism, which is central to rebalancing, has not been functioning well, as many countries have been limiting the appreciation of their own currencies in the wake of the growing pressure on the U.S. dollar. Such resistance will delay but not prevent the inevitable.

Exchange rates will matter more to export competitiveness when export demand recovers and countries compete to raise their market share. This is likely to be augmented by intense competition for foreign investment.

The world is likely to witness major currency realignments this year. The process will entail considerable exchange-rate volatility and massive capital movements, which will keep the monetary authorities exceedingly uptight.

There is also the danger of the global economic recovery being stymied by the bursting of asset bubbles in some countries, notably China. This has serious implications for the banking sector, as banks have accepted mortgages for collateral. In China, bank credit has ballooned to 9.21 trillion yuan (RM4.5 trillion) during January-November last year and is expected to expand by another eight trillion yuan this year.

Inflation, which went into hibernation last year because of depressed demand, is likely to rear its ugly head again once demand recovers this year. It is an open secret that some countries have resorted to printing money to finance their fiscal stimulus plans, and it does not take a genius to figure out how this will impact prices once demand picks up.

Countries that fear inflation the most are likely to raise their interest rates this year, from the low levels to which they were driven by the global recession. While high interest rates may keep inflation at bay, they can scuttle the fragile recovery by dampening consumption and investment.

There is also a strong likelihood that oil prices will climb, with increased production and consumption of goods and services. While high prices of oil are music to the ears of oil producers, the world economy will suffer not only from pass-through inflationary effects on prices but also from subdued demand.

Unemployment is likely to remain a thorny problem this year, despite positive GDP growth. Already there is evidence that employment numbers do not move in tandem with GDP everywhere, notably in the U.S., where one-tenth of the workforce is still jobless.

It is instructive to note that employment lagged 18 months behind GDP recovery in South Korea after the Asian financial crisis a decade ago.

In the first of half of this year, the chances of a relapse in the U.S. is reckoned to be 35 per cent, with a 50 per cent probability of a marked deceleration as the impact of the fiscal stimulus wears out. Another round of fiscal stimulus is a distinct possibility in the event of a let-up in recovery, although this will have serious sovereign debt implications.

Rising sovereign debt is a serious problem not only for the US but many other countries. There are fears that it can mutate into sovereign debt default.

The Dubai fiasco may be just a harbinger of other horror stories to unfold later this year. The bailout of Dubai World by Abu Dhabi cannot make the problem disappear, as it is no more than a change of ownership of the problem. Other countries that may succumb include such big names as Portugal, Italy, Greece and Spain.

This article was first published here in the New Strait Times.

Mohamed Ariff is a distinguished fellow of the Malaysian Institute of Economic Research and professor emeritus at the Faculty of Economics and Administration, University of Malaya