Global Issues to Watch - November 2012 by ISA - International Strategic Analysis

November 01, 2012 10:55 AM | Deleted user
Obama Wins (2012-11-07)
President Barack Obama defeated his Republican challenger Mitt Romney in this year’s presidential election in the United States by virtue of his ability to win nearly all of the hotly contested swing states in the US. Meanwhile, the Democrats retained their control of the US Senate, while the Republicans remained firmly in control of the US House of Representatives. As a result, the balance of power in Washington will remain unchanged as the United States prepares to deal with a number of immediate economic and political risks that will have to be dealt with by both parties.

President Obama defeated Mr. Romney by the narrow margin of 50% to 48% in terms of the popular vote in the presidential election, although he won at least 303 of the 538 votes in the Electoral College (Florida’s 29 electoral votes had yet to be allocated). The president’s larger-than-expected victory in the Electoral College was the result of his ability to win nearly all of the swing states that ultimately decided the winner in this election, often by much larger margins than had been anticipated. Furthermore, the president benefitted from strong support from minorities in the US, while his management of the recent storm disaster in the northeastern US also boosted his support in the final days of the campaign.

As little has changed in terms of the balance of power in Washington in the wake of the 2012 presidential and congressional elections, Democrats and Republicans will have little choice but to immediately turn their attention to a number of key issues impacting the United States. The most pressing issue is the looming “fiscal cliff” consisting of tax hikes and public spending cuts that will be triggered at the end of this year unless the two parties can reach a budget deal before that time. Meanwhile, foreign policy is likely to loom large in the coming months as relations with China remained strained, the civil war in Syria continues to intensify, Iran continues to push forward with its nuclear program and as Europe faces a severe economic crisis. If Democrats and Republicans fail to work together on these issues, a dangerous political stalemate could bring the US government to a halt.

The French Economy at Risk (2012-11-06)
While much of the attention on the European economy has been focused on the crisis in southern Europe, more attention is now being paid to France as that country also faces what could be a prolonged economic slump. This is due to the fact that many of the factors that have led to the devastating recession in southern Europe are also present in France to some degree. As a result, it is up to France’s Socialist government led by President Francois Hollande to take the necessary steps to reform the French economy before it is too late.

Despite the fact that France’s economy has stagnated this year and the country’s unemployment rate has risen to 10.8%, France has not faced the degree of economic difficulty as its neighbors to the south, Spain and Italy. However, France too has seen its economic competitiveness fall sharply vis-à-vis other developed economies such as Germany and the United States and this is threatening to usher in a period of prolonged economic decline in the Eurozone’s second-largest economy. Moreover, France remains heavily dependent upon European export markets that are likely to remain very weak for the foreseeable future, forcing French exporters to seek markets outside of Europe.

These challenges fall to new French President Francois Hollande and his Socialist Party that enjoys near-total power in France at present. In recent weeks, international and domestic experts have called on President Hollande’s government to enact major reforms such as reducing the size of the public sector in France and reforming the country’s tight labor market. However, these reforms are unpopular among many elements of the ruling Socialists, raising the possibility that this government will not follow the lead of the previous Socialist-led government in Germany under Chancellor Gerhard Schroeder that enacted many of the economic reforms that have enabled Germany to defy the crisis in Europe by improving its economic competitiveness. If the French government doesn’t act soon, France risks being lumped together with Spain, Italy and other southern European economies in a zone of long-term economic decline.

Hurricane Sandy and the US Elections (2012-10-31)
Hurricane Sandy caused massive damage to many areas of the northeastern United States just one week before presidential, congressional and state elections in the US. While the immediate focus is on relief and rescue efforts in areas of the US impacted by this massive storm, attention has also turned to how this disaster will impact these elections. In particular, the tightly contested presidential election between President Barack Obama and Republican challenger Mitt Romney could be swayed by the impact of Hurricane Sandy.

Never before has a presidential election in the United States been impacted by such a natural disaster. With Hurricane Sandy causing dozens of deaths and major damage to many areas of the heavily populated northeastern United States, there are fears that voting in this election could be disrupted in many areas, particularly as millions of people have lost power. Moreover, this disaster took President Obama and Mr. Romney off of the campaign trail for a period time and may have cost the Republican challenger some of the momentum he had been building in recent weeks, while allowing President Obama to remain in the spotlight as he led disaster-relief efforts.

Most of the states that were impacted significantly by Hurricane Sandy were states that are considered locks for President Obama to win and thus will have little impact on the Electoral College. Nevertheless, voter turnout in these states could be much lower than had been anticipated and this could hurt the president’s chances of winning the national popular vote. 

However, two swing states (Ohio and Pennsylvania) were also impacted by this disaster. In Ohio, President Obama has maintained a slight lead in the polls, but the storm’s greatest impact was on the heavily Democratic northeast corner of the state. Meanwhile, Pennsylvania had been considered a likely win for President Obama, but the storm’s major impact on that state could lead to a surprise there as well, particularly if voter turnout is much lower around the city of Philadelphia. Surprise victories by Mr. Romney in both of these states would allow him to lose other swing states such as Colorado, Virginia and New Hampshire and still win the election, although Pennsylvania still appears to be a long-shot for the challenger.

Will the US Save or Sink the World Economy? (2012-10-29)
In the coming months, the United States economy will be in a position where it will either become a leading engine for a global economic recovery or it will drag the world down into an even worse economic downturn. The evidence for the US being a pillar of economic growth is seen in the fact that the US economy grew at a healthier pace in the third quarter of this year. However, politics could get in the way in the form of the looming “fiscal cliff” that could have a major negative impact on the US and global economies.

It had been expected that the United States economy would grow at a faster pace in the second half of 2012 and the 2.3% GDP growth (year-on-year) that it recorded in the third quarter of this year was welcome news for the global economy. While most of the world’s developed economies are struggling to avoid a recession and many key emerging markets are in a slowdown, the United States has re-emerged as a leading pillar of growth for the global economy. Moreover, if US politicians allow it to occur, the US economy is set to realize even higher rates of growth in late 2012 and early 2013, providing exporting economies around the world with a chance to boost their levels of economic growth.

While most of the recent economic news from the United States has been positive, there is one factor that continues to threaten the health of the global economy, the looming “fiscal cliff” in the US. This “fiscal cliff” is a series of tax increases and spending cuts that will go into effect in 2013 unless the US Congress can reach a new budget deal before the end of this year. Should the Congress fail to do so; there is a strong chance that the US could fall into another recession, a factor that would severely delay recoveries in Europe, China and elsewhere. As such, lawmakers in the United States will have an enormous amount of influence over the direction of the global economy in the coming year.

Two Weeks Until the US Presidential Election (2012-10-24)
With less than two weeks to go before the presidential (and congressional) elections in the United States, the race between Democratic President Barack Obama and Republican candidate Mitt Romney is tighter than ever. Just a few weeks ago, it appeared that President Obama was on his way to a relatively easy election victory as he led in the polls in all of the key swing states across the United States. However, a poor performance in the first electoral debate has cost President Obama some support, as has a much-improved campaign by Mr. Romney, who has overcome a series of gaffes to be in a position to win this election.

As always, this presidential election in the US will be decided by a handful of swing states that are roughly divided between supporters of the Democrats and the Republicans. At the end of the summer, President Obama had the lead in the polls in all of these swing states and was even challenging Mr. Romney in a number of traditionally-Republican states such as Arizona and Missouri. However, the Republican challenger has surged in the polls in recent weeks and is now in the lead in swing states in the South (Florida and North Carolina) and has drawn even with the president in two other swing states (Virginia and Colorado).

However, for Mr. Romney to unseat President Obama, he will have to make even more gains in swing states where he continues to trail in the polls, but by a smaller margin. For example, it seems unlikely that Mr. Romney can close the gap with the president in the states of Pennsylvania (50% to 45% for the president) and Michigan (49% to 44%). Even if Mr. Romney wins Virginia and Colorado, he will be 13 electoral votes short of the 270 he needs to win the presidency. This leaves five swing states in which Mr. Romney is trailing in the polls by margins of between 1.5% and 3.0%; Ohio (18 electoral votes), Wisconsin (10), Nevada (6), Iowa (6) and New Hampshire (4). To win the election, Mr. Romney must win not only Virginia and Colorado, but also Ohio, a state that every victorious presidential candidate has won since 1960.

China's Economy Slows in the Third Quarter (2012-10-23)
China’s economy continued to slow in the third quarter of this year, although it did not slow as much as some economists had feared. This raised hopes that the slowdown in China was close to bottoming out and that higher rates of growth could be realized in the world’s second largest economy in 2013. However, the Chinese economy will continue to face a number of internal and external challenges that could prevent it from returning to double-digit growth rates in the coming years.

Chinese GDP growth slowed to 7.4% on an annualized basis in the third quarter of 2012, its lowest rate of growth since early 2009. This slowdown was attributed to the growing weakness of many of China’s key export markets, particularly Europe, and this has led to lower levels of export growth in recent months. This growth rate would have been even lower had the Chinese government not begun to introduce some stimulus measures into the economy. Most notably, the government has encouraged banks to boost lending to consumers and businesses in a bid to allow China’s domestic market to offset the weakness in export markets.

As there were fears that economic growth in China could fall to as low as 7.0% during that period, the third quarter’s result was welcomed by exporters and investors as a sign that China’s slowdown was approaching an end. However, export markets in Europe and parts of Asia are forecast to remain weak over the near-term and the recovery in North America will not be strong enough to offset these region’s poor outlooks. As a result, while the stimulus measures being enacted by the Chinese government will prevent a hard landing, it is likely that economic growth will continue to gradually slow into early 2013 before once again trending upwards. However, it is highly unlikely that China will be able to record the incredibly high rates of economic growth that it did in previous years and will instead realize growth rates in the range of 8.5% to 9.0% over the next few years.

Who Will Import in 2013? (2012-10-17)
With the growth rate for global trade forecast to remain relatively low in 2013, exporters will again be challenged to determine which export markets will provide the best opportunities for growth next year. Moreover, with many key emerging export markets forecast to remain weaker than in previous years, emerging markets will not provide such a large share of export growth as they have done over the previous decade. Instead, there are likely to be major regional discrepancies when it comes to the health of export markets in 2013.

The economic crisis in Europe and the economic slowdown underway in China, India and other key emerging markets have resulted in these economies importing much lower levels of goods and services this year. With Europe’s economy forecast to remain in a recession for much of 2013, most European countries will record little or no import growth next year, with the possible exception of Germany and a handful of smaller northern European countries. Meanwhile, import growth levels in the major emerging markets such as China and India are forecast to remain well below their previous highs as the slowdown in global trade and investment has had a major impact on these countries’ domestic markets.

As so many of the world’s leading importing countries are set to face another year of sluggish growth, exporters will struggle to find markets for their goods and services in 2013. One region that is forecast to record solid import growth is North America, where the rebounding United States economy and a stronger dollar are allowing the US to once again become an important pillar of global economic growth. Meanwhile, mid-sized emerging markets such as Indonesia and Thailand will continue to record respectable import growth levels next year as their domestic markets expand. Finally, despite its slowdown, China will remain a key source of growth for exporters around the world, even as its import growth levels fail to match previous levels in the coming year.

Syria and the Balance of Power in the Middle East (2012-10-16)
While Syria’s civil war is largely a domestic affair, its outcome will have a major impact on the shifting balance of power in the Middle East and will have significant implications for all of the region’s leading powers. The most apparent impact of the eventual outcome of Syria’s civil war will be realized in the five countries that share a border with Syria, as this conflict has the potential to destabilize each of them. However, countries further afield in the region, as well as global powers with a stake in the Middle East, will also feel the impact of this worsening conflict.

For the five countries that share a border with Syria (Turkey, Lebanon, Israel, Jordan and Iraq), the escalating civil war in that country is rapidly threatening to involve each of them. On one head, more than a quarter of a million refugees have fled Syria for its neighbors, overwhelming their ability to cope with this refugee influx. Meanwhile, the conflict has already spilled into Turkey and Lebanon, threatening to draw the former into the war and threatening the latter with its own civil war. Adding to the uncertainty are the concerns that a new government in Syria could prove much more hostile to Israel and could move to take a more aggressive stance regarding the Golan Heights territory that has been under Israeli control since 1967. 

Syria’s civil war is not only impacting its neighbors, but is involving a number of other powers involved in the region. For Iran, Syria is the only country in the eastern Mediterranean region that it can call an ally, so the potential ouster of the Assad regime would be a geopolitical disaster for Iran. In contrast, Saudi Arabia has openly backed the rebels in Syria and stands to gain significant influence inside Syria should President Assad fall from power. Further afield, Russia stands to lose its leading ally in the region should the rebels in Syria prevail, weakening Russia’s already poor position in the Middle East. Finally, the United States would welcome a new government in Syria, but is likely to be concerned that Iran will seek to bolster its position in Iraq should its Syrian ally fall, adding to the destabilization of that country.

Reprinted from ISA Report published November 1, 2012 (updated November 7, 2012), International Strategic Analysis, 
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