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2014 is quite a year. The world economy has witnessed faltering growth in the euro area, plummeting oil prices, and flaring geopolitical tensions that posed unforeseen challenges to global recovery.
Looking back, at the beginning of the year, economists had expected a slow and clear takeoff. But data in the first half suggested the takeoff was unsure. In October, the International Monetary Fund called the recovery "disappointing" -- one that is brittle, uneven, and beset by risks.
Uneven recovery continues
In its October World Economic Outlook, the International Monetary Fund (IMF) said global recovery has taken a slower pace than expected in recent years. Citing threats from the legacy of the financial crisis and lower potential growth rate in the medium term, the Fund lowered global growth forecast to 3.3 percent in 2014 and 3.8 percent in 2015.
China and the United States, nevertheless, starred in the lackluster world economy, taking a major share of global growth.
According to Chinese Vice Finance Minister Zhu Guangyao, China's contribution to the world newly-increased GDP would be 27.8 percent in 2014, and the U.S. share would be 15.3, based on the IMF calculation.
China's growth of more than 7 percent over the last year has provided considerable momentum to global aggregate demand, said Uri Dadush, a senior fellow at Carnegie Endowment for International Peace and a former World Bank official.
The IMF predicted China's growth would slow to 7.4 percent this year and 7.1 percent in 2015.
Nathan Sheets, U.S. Treasury's Undersecretary for International Affairs, said the Chinese economy would continue moderate growth in the years ahead, in view of its rebalancing away from exports and investment toward private consumption and household demand.
The U.S. economy is a bright spot in advanced economies in 2014, with a labor market continuing to improve. By November, America had added more jobs in 2014 than in any full calendar year since the late 1990s.
Personal consumption remains robust and inflation expectation remains stable. In view of the strong performance, the Federal Reserve ended the asset purchase program in October, a further step toward monetary policy normalization.
The IMF expects the U.S. economy to grow 2.2 percent in 2014 and accelerate to 3.1 percent in 2015.
Dadush said many factors will propel the global economy forward in 2015, including rapid growth in large parts of the developing world, such as China, India and Indonesia, recovery in the United States and Britain, loose monetary policies, smaller cuts in government spending, and falling oil prices.
"These engines are powerful enough to ensure that we will steer well clear of another global recession," said Dadush.
Uncertains ainties lie ahead
Although the world economy will keep recovering next year, the road ahead remains bumpy. According to the IMF, risks to the fragile global recovery come from several sources: increased geopolitical tensions, shocks originating in financial markets, and macroeconomic disappointments in systemically important countries or regions.
Most factors, such as structural deficiencies in the euro area that have weighed on global GDP growth in 2014, will remain in place in the next two years, said Marie Diron, a Moody's senior vice president.
The IMF also warned that major advanced economies, especially the euro zone and Japan, could face an extended period of low growth that could turn into stagnation, with a further adverse impact on potential growth.
Despite supportive financial conditions, the euro area is still a long way from emerging from its debt crisis, and its economic recovery ground to a halt in mid-2014, with inflation below the European Central Bank (ECB) target and unemployment near record high.
Many institutions and economists do not expect any significant rebound in GDP growth in the near term.
According to Moody's latest forecast, the area's economy is expected to grow by 0.9 percent and 1.3 percent in 2015 and 2016 respectively, after 0.7 percent in 2014, less than it previously expected.
European policymakers have taken steps to prop up demand and fend off the risks from persistently low inflation, such as ECB's announcement of significant outright purchases of private assets. But economists widely believed the euro area should do more.
According to economists from the Peterson Institute for International Economics (PIIE), monetary and fiscal policies in the area should more actively work in tandem with productivity-enhancing structural reforms, such as deregulation and deepening the single market, to shift the euro area toward a path of higher growth and stable prices.
Japan is also on the center of concerns. In the country, the recovery in private consumption has been slower than expected and the underlying momentum for private investment is weak.
Its monetary policy has helped lift inflation and inflation expectations, but only monetary policy will not work and it needs to be supported by growth and fiscal reforms to take effect, the IMF says.
Moody's expects the lackluster global demand will act as a drag on Japan's GDP growth, significantly reducing the economic benefits from the weakening of the yen.
The rating agency expects that tighter fiscal policy, including next year's planned second increase in the consumption tax, will curtail domestic demand in the next few years.
However, economic activity will be supported by monetary stimulus, which gives scope to implement fiscal and economic reforms.
The IMF expects the Japanese economy to grow 0.9 percent this year and 0.8 percent next year.
Divergent policies pose risks
In addition to possible stagnation risks in Japan and the euro area, a key economic uncertainty next year is diverging monetary policies of the advanced economies.
While the Fed is expected to raise interest rates some time in 2015, the euro zone and Japan will continue loose monetary policies to support weak demand.
Investors are keeping a close eye on the future paths of U.S. inflation and European economic growth, said the Standard & Poor's. The path of U.S. consumer price inflation will dictate the timing and degree of the Fed's interest hike, while the risk of recession in Europe could jeopardize the U.S. economic recovery and also influence the Fed.
As the United States is tightening its monetary policy, Moody's said, a broad-based asset price correction could occur, triggering a steep and far-reaching increase in financial market volatility, raising financing costs across markets, restrain capital inflows in emerging markets and in turn dampen economic growth.
William Dudley, vice chairman of the Fed, said the U.S. central bank will be cautious in the pace of monetary policy tightening, which will depend not only on the economic outlook but also on how financial market conditions respond as the Fed begins to remove monetary policy accommodation.
Fed Chair Janet Yellen said in December's press conference that the Fed considered it unlikely to begin the normalization process for at least the next couple of policy meetings. The central bank's next scheduled policy meeting is on Jan. 27-28. The following is March 17-18.
Lower oil prices to boost global growth
Deflation has been a potential threat to the world economy, and the recent sharp decline in oil prices might weigh down the headline inflation in some countries. But unlike previous scenarios in which falling oil prices reflected withering demand and weighed heavily on growth prospect, most economists and regulators believe lower oil prices will support demand of net oil importers and give a boost to global growth.
The IMF expects the recent appreciable fall in oil prices, if sustained, will boost growth. Yellen said it will have only transitory downward pressure on U.S. inflation, and will boost household demand just like tax cuts. The Bank of Japan also downplays any concerns of potential threat on its pledge to foster 2 percent inflation, instead welcoming the resulting boost to growth.
David Stockton, a senior fellow at the PIIE and former head of the Fed's economic research division, said low inflation is indeed a concern for major economies in the world. But he does not believe there will be deflation risk next year, as positive boost from the lower oil prices will gradually lift the price level but at a much lower pace.
According to Moody's, moderate growth in oil demand coupled with steady increase in supply will keep oil prices broadly stable around recent lower levels next year. The lower oil prices will benefit most Group of 20 economies, which tend to be net oil importers, but have a negative impact on growth in net oil exporting countries such as Russia and, to a lesser extent, Mexico.
In addition, geopolitical risk is widely seen to remain a challenge to the world economy next year. But S&P believes the impact of most current geopolitical flashpoints is likely to be regionally contained, and will only in the rarest of circumstances spill over into the global scene to have an impact on far-flung economies.
