A very great deal -- but not everything -- about the prospects for the global economy in the coming year will depend on China's ability to handle two transitions at once.
The first is the political transition in the leadership to the new so-called Fifth Generation, all of them born in the decade after 1945. The second is the increasingly urgent transition from an investment-driven to a consumption-driven economy. This will be made all the harder by the near certainty that global growth will be constrained in 2012.
The main reason for this is that Europe, China's biggest export market, is still rocked by the euro's troubles and the unresolved sovereign debt crisis. Europe is facing a year of severe austerity as Germany pursues its quixotic attempt to impose fiscal orthodoxy on the southern Europeans. On top of those burdens, Europe will face a sharp credit crunch as its banks hoard cash to meet the new capital requirements.
This isn't to predict that the euro will collapse; there is too much political capital invested in its survival. But unemployment and bad debts will rise, consumption will stagnate or even fall and the streets of Italy, Spain, Portugal and Greece will see angry and increasingly organized opposition.
China's second biggest export market, the United States, is likely to continue its anemic and sub-par recovery. It will be surprising if either political party seeks a full-blown confrontation over the national debt ceiling in an election year but there will be no attempt to stimulate the economy so unemployment will stay high and house prices will continue to drift downward.
Growth is unlikely reach much above 2 percent for the year and if a Republican wins the White House in November then the United States is likely to follow Europe into a dismal austerity.
And an election year is likely to sharpen the trade tensions with China, which have already reached worrying proportions after China imposed duties of up to 22 percent on large cars and sport utility vehicles made in the United States in what looked to be retaliation for U.S. complaints over Chinese dumping in wind and solar power exports.
After Europe, the United States and China, the next biggest economy is Japan and with a very strong yen and falling exports to Europe, Japan's trade balance went into the red in November for the second month in a row.
With by far the highest level of sovereign debt of any leading economy, Japan could face a debt crisis. Standard and Poor's and Moody's each downgraded their ratings for Japanese government bonds last year and have announced they are waiting for a credible plan of fiscal reform in 2012. With the government predicting 2.2 percent growth based on the hope of a domestic consumer boom, the ratings agencies are unlikely to be satisfied.
Looking at the other big economies, Britain is locked into stagnant austerity and Brazil's boom has stalled. India has seen industrial production falling and faces a budget deficit of 9 percent so it is likely to see growth slow sharply. Russia will benefit from high energy prices but continue to suffer capital flight as nervous investors watch the political crisis that is undermining the Putin regime. Canada is likely to outdo Germany and deliver the best performance of the traditional Group of Seven countries.
The politics of the Middle East and the coming embargo on Iranian oil are likely to keep oil prices high, while the shale gas revolution in the United States should keep natural gas prices from rising to match.
Renewable energy prospects will continue to disappoint, with what looks to be a very costly and embarrassing problem about to hit Germany's booming wind sector. Two large new wind farms in the North Sea are ready to start work but the transmission lines aren't ready to feed their power into the grid. Since giant windmills have to move to face the wind, the Germans may have to power them with dirty diesel until transmission lines are in place.
Surprises like this can be expected to recur throughout the coming year. We now know that Spain's budget deficit is going to be much larger than anyone expected and Spain's regional governments are far more indebted than they previously admitted. So Spain will be high on the eurozone watch list this year.
Then there are the vagaries of the vote, with presidential elections in the United States, France and Russia, to add to the unpredictable nature of the year.
One wild card to watch will be the performance of the anti-immigrant Front National candidate Marine le Pen in the French elections. Ten years ago, her even more far-right father stunned Europe by forcing the incumbent Socialist prime minister into third place. Now she is also running on a pledge to take France out of the euro and a poll last month by Ipsos-Logica, indicated 45 percent of respondents said the euro was bad for the French economy and 36 percent wanting a return to the old franc.
In the end, the prospects for 2012 will depend on China's ability to avoid a hard landing brought on by the combination of a property crash, a banking crisis and the need to rescue some bankrupt local authorities. The odds of this happening before 2014 are about 1-in-3, analysts at Japan's Nomura Group say. Since China alone accounted for almost half of global growth last year, that risk looks uncomfortably high.
One thing is certain: Governments around the world are out of fiscal ammunition. If Europe's likely double dip slows both China and the United States, there is little the politicians can do. That is why the extraordinary measures to create liquidity by all the big central banks have become so crucial and why economists are wondering at what point all that extra liquidity translates into a new inflation. This will be a year of living dangerously.