A year when more realistic expectations should not lead to disappointment

We have become too gloomy not because what is happening is particularly disturbing but because we have unreasonable hopes

Good morning. Happy New Year. But it is a far cry, is it not, from the euphoria with which we greeted the Millennium New Year just three years ago? The Dome is gaunt and empty. The high-tech boom is bust. The world economy faces the possibility of a second downward lurch. Our exuberance has been shattered by fear of terrorism. And now, in all probability, there will be a Middle East war. Um.

Good morning. Happy New Year. But it is a far cry, is it not, from the euphoria with which we greeted the Millennium New Year just three years ago? The Dome is gaunt and empty. The high-tech boom is bust. The world economy faces the possibility of a second downward lurch. Our exuberance has been shattered by fear of terrorism. And now, in all probability, there will be a Middle East war. Um.

But, in many ways, our present caution is more rational and more helpful than the exuberance of three years ago. It is more rational because, well, parties never go on forever. It is more helpful because we can now build a set of expectations that enable us to calibrate the news as it comes through in a sensible way. We have become too gloomy in recent months not because what has been happening is especially disturbing but because we had unreasonable expectations. Yes, of course, what is happening in the Middle East is profoundly disturbing, but it was just as disturbing three years ago. Back then we just weren't paying proper attention.

So what should the rational optimist expect of 2003?

In geopolitics, the dangers are obvious; the surprises less so. We have to start with the Middle East because that will dominate the first part of the year. We have to assume that there will be war with Iraq and that it will, in military terms, be successful. Of course, neither of those propositions is certain but they should form the base line of our thinking.

For those who will be directly involved, nothing that outsiders can say will be helpful. But, from a global perspective, the danger is the obvious one that some sort of catastrophe will occur that would have effects far beyond the region itself.

On the other hand, the pleasant surprise would be if "regime change" in Iraq were coupled with a fresh start for Palestine and the opportunity for greater stability throughout the region. That possibility should not be ruled out, however unlikely it seems right now.

Elsewhere in the world, the usual suspects will continue to be, well, suspicious. Looking back over recent history there seems a sad inevitability about the way in which so many of the pressure points of the past half-century remain the pressure points of today: Kashmir, North Korea, Russia's southern flank, the Taiwan/China relationship and so on.

An important distinction can be made, however, between tensions that may create misery for the region but are unlikely to affect the rest of the world, and those that pose a global threat. Into the former category come the wars of sub-Saharan Africa; into the latter comes North Korea's nuclear arms programme. Rationally, the dangers of the second group are surely no greater now than they have been at any time in the last decade but, because we are more edgy, we worry more.

In economic terms, the overwhelming issue is the threat of recession, and that discussion starts with the prospects for the price of oil. Oil remains the largest single source of primary energy, and the world economy is heavily dependent on the Middle East, far too dependent, for its supplies. Provided economic growth is maintained the world can "pay for" a war – insofar as one can ever pay for the loss of human lives.

We tend to forget just how vast is the world economy: total world output is about $30,000bn (£18,600bn) a year. The highest estimates of the costs of a Middle East war, which include a sharp rise in the oil price, are around $600bn. That would be equivalent to only about six months' natural growth. But if supplies were to be seriously disrupted and the oil price were to rise to, say, $80 a barrel, then a serious world recession would follow.

Take that threat out and the world economic outlook appears less gloomy. There will, in all probability, be another year of disappointment. Some countries will be very disappointing: Germany and Japan will both dip into recession. Germany will pull down the whole eurozone, putting paid to any question of Britain adopting the euro at this time. But the US and UK will manage some growth and that may be enough to ward off global deflation and to encourage the financial markets to recover a little self-confidence.

And there could very well be pleasant surprises. The UK's superior performance through this downturn so far has been one such surprise and another year of calm, reasonable growth would be, if not a surprise, at least an encouraging sign.

And society? It is so vast a subject, yet it is almost alarmingly easy to spot dangers. Viewed globally, two great chasms are obvious. One is the gap in living standards – and also in ideas of how societies should be organised – between the rich and poor worlds. The other is one mostly of political attitudes, but also to some extent human values, between the US and the rest of the developed world.

As far as the first is concerned, the economic gap is not going to be narrowed much for many years to come. But that might be more acceptable were the poorer nations to see some movement, and for it to be possible to have some sort of dialogue about social organisation. Surely there are core ideas about social organisation, about families, about human rights that cut across economic wealth?

As for the divide between the US and the rest of the world, well, that is something we will have to live with too. From a US perspective, Americans sometimes feel that Europeans are, in Kipling's phrase: "Making mock of uniforms that guard you while you sleep." Meanwhile, a British tabloid newspaper described the US President in its leading article yesterday as the "most dangerous man of the year". The Atlantic is perhaps wider than at any stage since the Second World War. Whatever view you take of the underlying issues, that itself must be alarming.

But in the world of ideas, too, there can be pleasant surprises. I would look to China and India, the world's two most populous countries, for that. China's new leadership has demonstrated economic liberalism and may feel enough self-confidence to permit more liberalism of thought – maybe not, but we'll see.

Last year seemed dispiriting because so few of the problems of the beginning of the year were solved. Following the 11 September attack on the US there was a war in Afghanistan, and one that in military terms was successful, but the chief quarry remains at large and the terrorist threat continues. So in this coming year we seem to be confronting again the same worries that faced us a year ago, with a similarly small prospect of resolution.

The advantage we have now, however, is that of more realistic expectations. Better to be cautious and be pleasantly surprised than to expect radical progress and be disappointed. It is very hard to be confident about geopolitics at this moment but, at a more narrow economic level, expect another year of adjustment – and by the start of 2004 the world should be ready for better growth.