After more than 40 years as a practising economist I should by now be used to eating humble pie.

After more than 40 years as a practising economist I should by now be used to eating humble pie. Nevertheless, going back in my files to re-read the piece that I wrote at this time last year demonstrated to me for the umpteenth time the danger of ever believing that one knows the economic future with any degree of certainty. Always better, in the oft-repeated but still so-true words of JK Galbraith, to be the economist who knows that he does not know.

In that article 12 months back I did at least note that the best we could hope for was a weak 2008 and then gentle recovery by year-end; and did note that all the risks to this benign picture were on the downside. But I had no premonition of exactly how bad it was going to be. Now my gut economist's instinct (and the international and domestic data) suggest to me that 2009 is set to be even worse than 2008. So I must hope to be wrong again but once more warn about the manifold downside risks that remain.

The sensible central expectation for businesses and households is that the first half of this year will be pretty dreadful. Recession in the UK will be formally confirmed in early January, and negative growth (decline in output) looks set to continue through at least the first two quarters of the year. At the same time unemployment will rise sharply across the UK, there will be many more cases for companies entering receivership and the stability of our major Scottish banks will remain uncertain. A great deal of bad news is built into equity markets, so the FTSE-100 may not fall significantly, unless a view develops that recovery by the end of 2009 is looking increasingly unlikely.

Will the UK economy begin to recover by the end of 2009 or are we set for a longer-lasting and more profound period of recession? Nobody knows the answer to this question. A great deal depends upon international developments; and a similar amount on the efficacy in practice of the policy measures introduced to date by Governor Mervyn King and Chancellor Alistair Darling. Will the remarkably sharp easing of monetary policy coupled with the dramatic fiscal injection prove sufficient to stabilise confidence and hold up demand?

We are in unknown territory so far as the move towards zero interest rates plus the Chancellor's fiscal stimulus is concerned. These unprecedented policy moves, and similar boosts undertaken and in hand across the globe, are not aimed solely at ending recession. They are also aimed at avoiding the devil that is deflation. The only recent(ish) experience of deflation - falling prices - was in Japan in the 1990s. That experience proved beyond doubt that once in recession exit was incredibly difficult. The answer has to be taking all feasible steps to avoid entering deflation - and doing so rapidly and comprehensively. Japanese policymakers dillied and dallied and Japan suffered for many years. Our policymakers acted relatively speedily - once the danger was clear - so far as the banking sector was concerned, as well as on the monetary and fiscal front. But still nobody knows if this aggressive approach will work.

A major problem is that the deflation risk is not just within one country but across the developed world. The Fathom forecasting team - all basically ex-Bank of England hot-shots - are forecasting deflation during 2009 in the US, UK and eurozone. That is scary.

It is worth emphasising that the eurozone is not immune from recession or deflation risk. To add to their problems, the countries in the zone have been suffering from the strength of their currency against the dollar and sterling. At least the traded sector in the UK and US is being helped to compete for such business as remains by a remarkably competitive exchange rate. Not so Germany, Italy, et al. The strength of the euro is unwelcome and comes because dollar and sterling weakness has to be matched by strength somewhere and the euro is the only other currency of substance.

So we must watch and see if the measures to date (bolstered by more fiscal measures, further rate cuts and "quantitative easing") begin to bear fruit as the year progresses. We must hope that the period of negative inflation is limited. And we must watch for other stresses emerging. China will matter. Growth there looks set to be halved at best. More substantial deceleration would be deeply troubling. The strains within the eurozone will increase to dangerous levels if the euro appreciates much more. Germany may be able to cope - just - but the domestic economies of the likes of Italy and Greece will really suffer. That could precipitate risk of fallout from the eurozone. Or protectionist tendencies could emerge - which could be matched in the US, even under the new president.

So, here's wishing you all a happy and healthy New Year - prosperous looks too much to anticipate for most of us, at least until 2010.

Jeremy Peat is director
of the David Hume Institute