GLOBAL ECONOMY 2010 - Crystal ball gazing

Courtesy Reuters

Thanks to roughly $5 trillion in special lending and spending programs, world finance leaders have managed to revive economic growth.

In 2010, the bills may start coming due.

The United States, the euro zone, Britain and Japan are all expected to report economic growth for the final three months of 2009, according to a recent Reuters poll of more than 150 economists. Official figures aren't due for several more weeks, but recent reports on factory activity and world trade point to a stronger fourth quarter.

While the pace of growth may slacken a bit in 2010, most forecasters think it will stay positive in advanced economies. But unemployment is likely to remain uncomfortably high, which suggests already strained government finances will worsen.

That will leave countries with limited resources to step in should the economy falter again. And the rising debt burden is beginning to raise alarms with some economists and investors.

The International Monetary Fund thinks debt as a percentage of gross domestic product will rise in all of the Group of Seven wealthiest countries in 2010, and probably remain elevated at least through 2014.

"The foundation of the global economy remains unstable even if the cracks have been smoothed over and we are all happy to forget what lies beneath the heavy layer of the public sector's liquidity insurance," said Lena Komileva, an economist with Tullett Prebon in London.

Komileva argues that the global economy is in the midst of a "mega cycle of multi-year economic trends" that won't quickly be resolved, even after growth is firmly established.

In addition to high government debt, many consumers are carrying large debt burdens, particularly in the United States and Britain. There is also the matter of elevated unemployment in most of the advanced economies, and credit is still not flowing normally between banks and borrowers.

Those factors, along with a tame inflation outlook, will probably give the major central banks ample reason to keep benchmark interest rates unusually low, at least through the first half of 2010 and perhaps well into 2011.

Longer-term interest rates, however, may rise anyway should investors grow more anxious about how countries will repay their debt when sluggish economic growth is curtailing tax revenues and aging populations are draining resources.

Higher long-term rates would make it costlier for businesses to fund investment or expansion, and for households to borrow money to buy cars and homes, putting a drag on the economic recovery.