LONDON: For those who like to live life on the edge, 2004 has been a year to savour. It's been a white-knuckle ride as the global economy has defied soaring energy costs , the ever-present threat of terrorist attacks and profound imbalances between the leading players to post what the IMF called the strongest growth performance in almost three decades.
There's no mystery as to the reason for this. Put simply, the world has been hauled along by the power of its two locomotives - the US and China. America's seemingly insatiable appetite for consumption and China's need for investment allowed the rest of the world to bank on export-led growth.
Only Europe failed to make the party. As the year came to a close, there were some signs that 2005 might be more tranquil. Oil prices came down a bit, the dollar depreciated, the pace of growth moderated from its rapid pace in the middle of the year.
In Britain, the heat came out of the housing market without any hard evidence that falling property prices would lead to a repeat of the recession of the early 90s.
As a result, it is perfectly possible that 2005 will be another year of solid growth. The pace of expansion may be a bit weaker than this year, but the trade-off is that it could be better balanced.
There are plenty of forecasters out there - including the IMF and the OECD - who think the global economy is on course for a soft landing, and they could well be right.
That, however, hardly makes for riveting reading - so here are five reasons to be worried. The first is that the relatively ordered depreciation in the dollar turns nasty. As Stephen Roche of Morgan Stanley points out, the dollar fell by 30 per cent in the late 80s when its trade deficit was only half as big as it is today.
So far, it has fallen by only 15 per cent on a trade-weighted basis, and the expectation has to be that it has further - perhaps a lot further - to fall. For years, what has been happening is that the US has sucked in imports from the rest of the world, and the exporting countries have recycled their foreign exchange reserves into US assets, helping to underpin both the dollar and Wall Street.
The house of cards could come tumbling down if the exporting nations lose faith in the dollar at a time when their sales to the US are drying up. The second reason to be cautious is that there is no effective mechanism for dealing with global imbalances.
Designed and built 60 years ago, the global financial architecture is not up to the job of coping with the demands put upon it by an increasingly integrated world economy.
Roche's suggestion that the largely ineffective G7 should be boiled down into a G5 - the US, the Eurozone, China, Japan and the UK - with a permanent secretariat and some real clout is an idea worth pursuing.
A third potential banana skin is that policymakers have been over-optimistic in assuming that the events of the past few months have merely been a blip. Global leading indicators have been pointing to the slowdown continuing for at least the first half of 2005 and given that in many countries - Britain and the US to name but two - house-price inflation has played a significant role in sustaining growth, there has to be a risk of the bubbles bursting.
The scope for a vigorous policy response should the slowdown persist, intensify and spread is limited given the size of budget deficits in Europe and the US, and the generally low level of interest rates. In this respect, Britain is better placed than most, since base rates of 4.75 per cent000 give the Bank of England ample leeway to loosen monetary policy.
Risk number four is the opposite of three - that the recent easing of oil prices will be short-lived if the past few months have indeed been merely a soft spot for the world economy.
Whatever production arrangements Opec might agree to, stronger demand will push up the cost of crude and other commodities. Research by Alliance Bernstein found that China was responsible for 79 per cent of the increase in global steel production in 2003, and consumed 37 per cent of the world's cement.
It is installing 150 gigawatts of electricity generating capacity, double the UK's total capacity. Every global downturn of the past 30 years has been associated with soaring energy costs, so watch the price of crude carefully.
Finally, there's the wider question of how the global economy copes with rapid Chinese growth. Clearly, the short-term risks to the west from a classic boom-bust cycle are distinct from the long-term risks posed by China's rise to economic superpower status. The reason to be worried about China in the immediate future is that it is in danger of overheating.
There has been a phenomenal spurt in investment in manufacturing plant and machinery far outstripping spending on transport and energy infrastructure. There are widespread bottlenecks in the economy, which the government is now trying to remedy through a concentration of infrastructure spending.
The disparity between China's manufacturing capacity and its lack of infrastructure means everything it sells on global markets is subject to deflation, everything it buys subject to inflation.
There will inevitably be a lag before the new infrastructure is built and there has to be a risk of China slowing quite markedly, even perhaps suffering a hard landing of the sort that visited the smaller countries of southeast Asia in the late 90s.
China's size means, of course, that the fallout for the rest of the world would be immeasurably greater. In the longer term, this will be seen as a hiatus in China's development, just as the wild gyrations in the US in the 19th century were an inevitable part of a rapid transition from agrarian economy to industrial powerhouse.
The question posed by the economists at Alliance Bernstein is whether the rest of the world is prepared for this. Textile-exporting countries such as Bangladesh will be the first to feel the effects of China's might from January 1, when the ending of the Multi-Fibre Agreements removes the preferential access they enjoy to western markets.
China's ability to mass produce good quality goods at competitive prices means there is a real fear that factories in Bangladesh and Africa will go bust. The idea, however, that China is going to be satisfied with low-cost manufacturing is a complacent fallacy.
It already has a burgeoning middle class and as the country becomes more affluent it will consume vast amounts of goods and services. Many of these are already being supplied by indigenous Chinese companies, which are now looking to expand overseas in sectors such as cars, consumer durables, computers and mobile phones. In effect, China is the Japan of 30 years ago - on a far bigger scale.
The sheer size of China's domestic market means that it will spawn world-class competitors who will produce top class goods at knock-down prices. For companies in the west, the message is clear: think strategically about China now or any short-term gain could quickly become long-term pain. -Dawn/The Guardian News Service.
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