Three key challenges for 2011

Flow of liquidity to emerging market: The relentless flow of liquidity toward the EM economies is posing a serious challenge to the recipient economies. The options vary between direct control of flows or market intervention, to prevent currency appreciation and/or building up of inflationary pressures. The near synchronous movement, of late, of the equities and commodities does indicate excess liquidity situation and is leading to asset price inflation, which might be running ahead of fundamental. How these economies cope with the flow and manage their policy objectives will be important take note of

 

Protectionism: Despite the joint decision by the G20 economies toward end 2008 to refrain from protectionism, we are seeing increasing instance of the same. Of late, more visible form of protectionism is in the form of currency warfare as the economies are indulging in direct intervention in the market to prevent currency appreciation which is likely to impact their export. As was the experience post World War I, increase protectionism can lead to a lower equilibrium

US unemployment: Falling level of unemployment is the kick-start that the US economic engine would require to start moving, rather than stuttering. Unless employment starts inching up, the economy will continue to falter. While it is accepted that the US economic growth will remain subdued, a stable outlook (rather than a weak one) will do wonders to global confidence