What can we expect as the world’s economy emerges from its most serious downturn in almost a century? The short answer is a “new normal,” with slower growth, a de-risked and more stable core financial system, and a set of additional challenges—energy, climate, and demographic imbalances, to name a few—with varying time horizons that will test our collective capacity to improve management and oversight of the global economy.

Lower growth is the best guess for the medium term. It seems most likely, but no one really knows. The financial crisis, morphing quickly into a global economic downturn, resulted not just from a failure to react to growing instability, risk, and imbalance, but also from a widespread precrisis inability to ”see” the rising systemic risk.

These defining characteristics will condition the responses and the results in coming years. There are countervailing forces. The high-growth countries—China and India—are large and getting larger relative to the rest. That alone will tend to elevate global growth compared to the world where industrial countries, and the U.S. in particular, were in the growth driver's seat.

The current crisis has come to be called a “balance-sheet recession” of global scope and tremendous depth and destructive power because of its origins in the balance sheets of the financial and household sectors. Extreme balance-sheet destruction is what made it distinctive. In the future, central banks and regulators will not be able to afford a narrow focus on (goods and services) inflation, growth, and employment (the real economy), while letting the balance-sheet side fend for itself. Somewhere in the system, accountability for stability and sustainability in terms of asset valuation, leverage, and balance sheets will need to be assigned and taken seriously.

Financial re-regulation should and will emphasize capital, reserve, and margin requirements; limit systemic-risk buildup by constraining leverage; eliminate fragmented and incomplete regulatory coverage and regulatory arbitrage—a huge challenge internationally; and focus on transparency. Isolating and further constraining a portion of the banking system, so that the channels of credit intermediation are less prone to complete and simultaneous breakdown, also seems likely.

Relative to the recent past, the cost of capital will increase, debt will be more expensive and less ubiquitous, and risk spreads will not return to precrisis compressed levels. Asset bubbles will not disappear, but they will be less likely to be turbocharged by leverage.

American consumers will save more and spend less, abandoning the pattern of the last few years. The large hole (on the order of $700 billion or more) in global aggregate demand will have to be filled over time by a compensating increase in consumption in surplus economies, such as China and Japan. The longer this takes, the greater the incentives at the national level to capture a share of global demand via protectionist measures.

The recent increase in protectionist measures is an understandable political price for a range of stimulus packages in advanced and developing countries. But such measures may increase—and will be harder to phase out over time—in the context of a shortfall in aggregate demand.

This is the forward-looking version of the global imbalance issue. Its resolution via coordinated policy action (or a failure to resolve it through such action) will have a huge impact (for good or ill) on the multinational incentive structure surrounding the global economy—and hence on its likely growth.

Responsibility for overseeing the global economy is passing rapidly from the G-7 and G-8 to the G-20, as it should. The latter accounts for 90 percent of global GDP and two-thirds of the world’s population, so this shift is highly desirable—indeed, essential.