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

December 01, 2012 10:15 AM | Deleted user
China's Improving Economic Outlook (2012-12-19)
With China’s economy having slowed to a 13-year low in 2012, there were fears that the Chinese economy could be headed for a prolonged slowdown that would have major implications for the global economy. However, there are increasing signs that China’s slowdown is coming to an end and that economic growth will accelerate in 2013. Nevertheless, there is little chance that China will return to the double-digit GDP growth rates that it achieved in the years prior to the global economic crisis, but it should remain a key pillar of global economic growth.

The Chinese economy, now the second-largest economy in the world, is forecast to grow by 7.7% in 2012, the lowest rate of annual economic growth in China since the 7.6% growth that was recorded in the wake of the Asian financial crisis in 1999. Moreover, growth rates in China have trended downwards in each of the first three quarters of 2012 as domestic demand has slackened and key export markets, particularly Europe, have remained weak. This downward trend, coupled with the continued weakness in many export markets, raised fears that GDP growth in China could fall to below 7% in late 2012 or early 2013.

Fortunately for a global economy that is increasingly reliant upon economic growth in China, the outlook for the Chinese economy is beginning to improve. For one, domestic demand appears to be rebounding thanks to stimulus programs initiated by the Chinese government that are boosting investment levels as well as industrial output in China. Second, export demand appears likely to rebound as long as the United States does not fall over the fiscal cliff and as long as other Asian export markets continue to grow. These factors will help to boost China’s economic growth rate to at least 8.0% in 2013 and could push growth rates towards 9.0% by 2014.

The Return of the LDP (2012-12-18)
After three years out of power, the once-dominant Liberal Democratic Party (LDP) returned to power in Japan after winning a crushing victory in last weekend’s parliamentary elections in that country. Back in power, the LDP will find itself confronting many of the same problems that it did when it was last in power. However, Japan’s relative decline has made many of these problems even more difficult to solve and it is hard to believe that the LDP will be the party to enact the painful reforms that are needed to boost Japan’s prospects in the coming years.

As expected, the Liberal Democrats easily won last weekend’s parliamentary elections in Japan. In the lower house of the parliament, the LDP won 294 of the 480 seats in that body, while its New Komeito allies won an additional 31 seats. As a result, the coalition between the LDP and New Komeito will have a two-thirds majority in the lower house and this will allow the new government to override the upper house of the parliament if it attempts to block its legislation. Meanwhile, the governing Democratic Party was handed a massive defeat in these elections as the number of seats in held in the lower house was reduced from 230 to just 57.

For new Prime Minister Shinzo Abe, a number of political and economic challenges await. On the political side, the foremost challenge is the rising assertiveness of China, which has manifested itself in the territorial disputes between China and Japan in the East China Sea that have led to a sharp deterioration in bilateral relations in recent months. Economically, the new government faces the same challenges as it did when it was previously in power; most notably attempting to boost Japan’s export competitiveness as its domestic market continues to shrink at an alarming pace. To do this, massive economic reforms will need to be enacted, but the LDP has a history of failing to promote such reforms, a major reason why the Japanese economy has struggled so much over the past two decades.

Flashpoints to Watch in 2013 (2012-12-12)
2012 has proven to be a violent year for many areas of the world, with major conflicts taking place in Syria, Afghanistan, Somalia, Congo-Kinshasa and Yemen. Moreover, political tensions have risen in many areas of the world in recent months and this is raising the possibility that more significant conflicts could erupt in 2013, while these ongoing conflicts continue to take lives and drive people from their homes. More ominously, some of the world’s leading powers could find themselves involved in some of these conflicts, endangering global peace and security.

Three flashpoints bear watching in 2013 as they could drag one or more of the world’s leading powers into a conflict in the coming year. First, China’s maritime disputes with its neighbors in the East China Sea and the South China Sea will become even more dangerous in 2013 as China’s assertiveness in these bodies of water increases and as the United States moves to support counter-claims from countries such as Japan and Vietnam. Second, Israel (and possibly the US) could launch an attack on Iran’s nuclear facilities, a move that would likely prompt Iranian reprisals in the Middle East and Afghanistan. Finally, the Caucasus region is growing increasingly volatile as Azerbaijan and Armenia edge closer to war, a conflict that could involve neighbors such as Russia and Turkey.

There are a number of wars that have continued in late 2012 that are show no sign of coming to an end in the near future and will be destabilizing factors in the coming year. The most important of these is the civil war in Syria, as rebel forces continue to gain international support in their efforts to oust President Bashar al-Assad. Meanwhile, wars in Afghanistan and Yemen will continue and could destabilize larger neighboring countries, while involving the United States. In Sub-Saharan Africa, a host of conflicts will continue, with the unrest in Congo-Kinshasa threatening to involve a number of that giant country’s neighbors. This is already the case in Mali, where 2013 will see if an international military force can retake the northern half of that country from Islamist and Tuareg rebels.

Economic Threats to Watch in 2013 (2012-12-11)
The world economy has undergone a tumultuous five years in which most of the world’s leading developed economies have been battered and some of its most dynamic emerging markets have been severely weakened. As 2013 approaches, the most pressing question is whether or not the global economy can stage a more sustained recovery from the second downturn of this five-year period than it did following the first. Standing in the way of such a recovery are a number of key threats to the global economy that could have a major impact in 2013.

A number of the leading threats to the global economy in 2013 have been in place for some time now. For example, the Eurozone’s debt crisis could flare up again as southern European economies remain deep in a recession that is now spreading to northern Europe’s export-oriented economies. Another holdover threat from 2012 is the sluggish (by their standards) growth in domestic demand in some of the world’s largest emerging markets that are now a key pillar of growth for the global economy. Finally, the threat of disruptions to the oil supply of the Middle East by a conflict involving Iran will remain firmly in place in 2013 and could result in a major spike in inflationary pressures next year.

In addition to these longer-standing threats, the global economy will face a number of new risks in the coming year. The most immediate risk is in the United States, where growth could slow sharply if that country’s politicians do not avoid the impending “fiscal cliff” that consists of tax hikes and public spending cuts. Another threat is the growing fear that Europe’s debt crisis is turning into a growth crisis that may well result in Europe experiencing “lost decades” just as Japan has done over the past 20 years. Finally, growing demand for natural resources could spark any number of conflicts in 2013 that could severely disrupt the global economy, including potential dangerous disputes in East Asia and Central Asia.

Key Opportunities for Foreign Investment in 2013 (2012-12-05)
With the global economy forecast to experience a slight upturn in 2013, opportunities for foreign investment will increase, even as many risks will remain in place. The world’s largest economies, the United States and China, will provide many of these opportunities as both countries are forecast to record higher levels of economic growth next year, although both countries continue to face risks that could derail their recoveries. In contrast, other key foreign investment recipients will struggle in 2013 as economic growth rates remain weak, in large part due to the weakness of their domestic markets.

The United States and China are the world’s two leading recipients of foreign investment and both countries should see an renewed influx of foreign investment in 2013. The US has the world’s most affluent domestic market, but this market has been damaged by the collapse of the US housing market and higher levels of unemployment. However, these factors are improving and this will again allow the US domestic market to attract significant foreign investment. Meanwhile, China’s economic downturn appears to be ending and growth is forecast to return in 2013. More importantly, this growth will be driven by the vast Chinese domestic market, who’s massive size will continue to attract foreign investment to China.

Other large economies such as Europe and Japan are forecast to continue to struggle to achieve economic growth in the coming years and this will have a detrimental impact on foreign investment in those regions. In contrast, some key economies such as Southeast Asia and Brazil are forecast to recover from 2012’s downturn and these markets’ vast potential will result in a new surge of foreign investment in 2013. In addition, natural resource demand will continue to rise and this will result in a continued influx of foreign investment in natural resource-rich countries. When taken all together, 2013 will be the year in which foreign investment levels recover from their recent downturn and this upward trend is forecast to continue in the years thereafter.

2013 Will be a Crucial Year in the Middle East (2012-12-04)
While 2011 will go down in history as the year that the Arab Spring ushered in unprecedented changes to the Middle East, 2013 could prove to be an even more decisive year in determining that region’s direction. For one, the political transition that began in many countries in 2011 is far from complete in the four countries that have changed governments over the past two years as well as in the host of countries in which governments are facing higher levels of opposition to their rule. Meanwhile, Syria’s civil war continues to rage, while Israel contemplates attacks on Iran, Hamas and Hezbollah.

In the wake of the political upheaval across the Middle East that began in 2011, it is easy to surmise that an Islamist tide is sweeping across the region. In fact, Islamist groups in various guises are now in power in Egypt and Tunisia and form the largest opposition groups to the governments of Jordan, Kuwait, Libya and Syria. However, factional divisions may be the greater legacy of the Arab Spring as countries such as Iraq, Syria, Lebanon, Yemen, Bahrain and Libya are all struggling to maintain their unity in the face of sectarian violence. As a result, the potential for even greater unrest across the Middle East in 2013 is substantial.

For a region that has already suffered from countless wars in recent decades, the Middle East faces the threat of a number of potential conflicts in 2013. One conflict that is already underway is the civil war in Syria and, despite rebel gains in recent months, the Syrian government appears likely to hang on to some degree of power well into 2013. Meanwhile, 2013 could be the year in which the Cold War between Iran and Israel finally turns hot, a development that could be one of the most destabilizing events in the modern history of the region. Finally, many countries in the region face the threat of a civil war such as the one that has devastated Syria. Should such a conflict erupt in one of the larger countries in the region (such as Egypt or Iraq) the potential for massive upheaval across the region cannot be ruled out.

Mursi's Power Grab (2012-11-28)
The decision by Egyptian President Mohammed Mursi to assume a wide range of new political powers has shaken Egypt and is threatening to lead to a new round of political unrest in that country. For the Muslim Brotherhood, this move is being viewed as a necessary step in preventing Egypt’s armed forces and supporters of former President Hosni Mubarak from rolling back the democratic advances made in Egypt over the past two years. However, for the president’s opponents, this move is seen as an effort to hijack Egypt’s revolution and allow the Muslim Brotherhood to dominate the country.

While President Mursi enjoys a good deal of support within Egypt, the fact that he did not consult with other political forces in the country when he decided to take additional powers was seen as a highly autocratic move. Moreover, this power grab was made at a time when Egyptian leaders are preparing to write a new constitution and has sparked concerns that President Mursi intends to prevent his opponents from stopping the country’s constitutional assembly from drafting an Islamist constitution. As a result, most of the political forces in Egypt opposed to President Mursi and the Muslim Brotherhood have taken to the streets to demand a renunciation of these new powers by the president.

This struggle for power threatens to unleash a new round of unrest in Egypt and to expose widening sectarian divisions within the country. Moreover, a destabilization of Egypt would have major ramifications for much of the Middle East. For one, the situation in neighboring Israel and Gaza remains highly unstable and Egypt has played a leading role in reducing tensions between Israel and Hamas. Furthermore, Islamist movements have been making major gains across the region in the wake of the Arab Spring and could be emboldened by President Mursi’s efforts to seize more power in Egypt. From Syria’s civil war to Tunisia’s newfound democracy, Islamist movements are becoming the dominant political force in the new Middle East and developments in Egypt could accelerate their rise to power.

Mexico's Bright Economic Future (2012-11-26)
After the creation of the North American Free Trade Agreement (NAFTA) in 1994, the Mexican economy was expected to realize soaring growth rates as it was given near-total access to the United States and Canadian markets. However, in the 18 years since NAFTA went into effect, Mexico’s average annual GDP growth rate has been only 2.7%, one of the worst performances by any large emerging market during this time frame. Fortunately, Mexico’s economic competitiveness has begun to improve in recent years and the outlook for Latin America’s second-largest country is dramatically improving.

With is proximity and access to the vast US and Canadian markets, Mexico is in an enviable position when compared to its emerging market rivals. However, Mexico failed to improve its economic competitiveness after the creation of NAFTA and was soundly defeated by rivals such as China and South Korea when it came to recording export growth to the United States and Canada. Despite a flood of investment from its northern neighbors, many foreign investors preferred to locate manufacturing operations in East Asia given the low labor costs there and the rapid growth in that region’s domestic markets.

As labor costs in China and other Asian economies have soared in recent years, Mexico’s export competitiveness has significantly improved and this has led to a new wave of foreign investment in Mexico’s manufacturing sector. As a result, Mexico has seen a sharp increase in exports not only to the rest of North America, but throughout Latin America as well. In fact, Mexican manufacturers are now competing with their Chinese rivals for market share in Brazil and other Latin American markets. If the new Mexican government can do more to reform the country’s economy, there is a strong chance that Mexico could enter into a prolonged period of high levels of economic growth, particularly as the outlook for growth on the United States export market is improving.

No Peace in Gaza (2012-11-21)
The latest conflict between Israel and Hamas was sparked by an increase in rocket attacks on Israel from Gaza, prompting a large-scale air and missile assault on Hamas targets by Israeli armed forces. This Israeli offensive has already resulted in more than 120 deaths inside Gaza, while retaliatory rocket attacks by Hamas on Israel have thus far killed three Israelis. Notably, Hamas was, for the first time, able to launch rocket attacks against Israel’s two largest cities, Tel Aviv and Jerusalem. Regardless of how this latest conflict ends, the prospects for a lasting peace between Israel and the Palestinians remains remote.

Much as Lebanon’s Hezbollah militants did in the wake of their 2006 war with Israel, Hamas was able to expand and improve its arsenal of rockets in the years following its previous war with Israel. This led to an increasing number of rocket attacks on targets in southern Israel in recent months. In response, the Israeli government under Prime Minister Benjamin Netanyahu felt compelled to respond in a very forceful way as it prepares to contest national elections in early 2013. Moreover, Israel’s armed forces are feeling pressure from all sides, with Hezbollah gaining power in Lebanon, Syria’s civil war threatening to spill over into the Golan Heights, Jordan facing increasing unrest and Egypt’s Sinai Peninsula becoming a hotbed of militant activity.

Regardless of how this conflict develops, there is almost no chance that Israel will be able to impose peace on Hamas. First, Israel does not have the will to bear the growing costs that taking control of Gaza on the ground would entail. Second, for the first time since Israel and Egypt signed their historic peace treaty in 1979, Israel is facing major threats on all of its borders, straining the capabilities of Israel’s armed forces. Most importantly, Israel’s relations with Egypt have changed dramatically in the wake of the ousting of President Mubarak last year and this is likely to lead to less cooperation between Israel and its most powerful neighbor in the coming years. Finally, Israel’s willingness to seek peace with its neighbors is being constrained by the rise of ultra-nationalist and religious political movements inside Israel, leading to a hardening of positions on all sides in the region.

Another Recession in Europe (2012-11-18)
The European Union officially fell back into a recession in the third quarter of this year, highlighting the deteriorating economic situation in Europe. While the debt crisis has eased in Europe (outside of Greece) in recent weeks, the region’s economy continues to weaken as austerity measures have damaged domestic markets and as export growth has slowed. As a result, austerity measures are not having as great of an impact on debt and deficit levels as had been hoped for due to shrinking tax revenues. Nevertheless, European leaders possess the ability to solve the debt crisis; but they do not have the ability to solve the worsening growth crisis in Europe.

The European Union’s total GDP contracted by 0.4% on an annualized basis in the third quarter, while the Eurozone’s economy contracted by 0.6%. As usual, Europe’s debt-laden southern economies fared the worse, with contractions recorded in Greece (-7.2%), Portugal (-3.4%), Italy (-2.4%) and Spain (-1.6%). Meanwhile, a number of northern European economies also saw their economies shrink, including the Netherlands (-1.4%), Finland (-0.8%) and Belgium (-0.3%). Finally, the Eurozone’s two largest economies, Germany and France, both recorded very low rates of economic growth (0.9% and 0.1% respectively), and both countries’ economies are forecast to slow further in the months ahead.

There are no easy solutions for returning the European economy to better health. Domestic markets will remain very weak as austerity measures reduce growth opportunities over the near-term and demographic decline reduces long-term growth prospects within Europe. This makes Europe increasingly reliant upon exports for growth. However, near-term export growth is unlikely as key export markets have weakened and as the euro has not weakened as much as had been hoped for by European exporters. Over the longer-term, Europe’s export competitiveness is likely to deteriorate when compared to key competitors, reducing this avenue of growth for Europe’s leading economies. As a result, long-term stagnation, as witnessed in Japan over the past two decades, is most likely the future outlook for the European economy.

Can Syria's Opposition Unite (2012-11-14)
The creation of a unified opposition coalition in Syria has raised hopes that the civil war in Syria can be brought to an end with the eventual overthrow of President Bashar al-Assad and his closest allies. However, despite this agreement, deep divisions remain within the coalition, particularly between the political groups that make up the coalition and the rebel armed forces that are battling against Syrian military. If these divisions cannot be bridged, there is a strong possibility that the civil war in Syria could go on for a long time, costing huge numbers of human lives and devastating the country.

The new opposition coalition, known as the National Coalition for Syrian Revolutionary and Opposition Forces, was formed at a meeting of the leading Syrian opposition groups in Qatar. This new coalition will be led by Moaz al-Khatib, a high-ranking Muslim cleric from Damascus that fled to Egypt earlier this year. This new coalition already has the backing of the United States and a number of Arab and European countries and it is hoped that the international supporters of Syria’s political opposition will be able to use the coalition to unify their efforts to support the ousting of President Assad and his government.

While the formation of a unified opposition coalition is a major step towards removing the Assad regime, the deep divisions that made the negotiations on the formation of this coalition so difficult serve as a reminder that there is no unified front in the fight against the Syrian government. In particular, rebel forces battling Syria’s military consist of a wide range of groups with vastly different goals and agendas. Furthermore, it remains to be seen if these disparate rebel groups will submit to the authority of the new coalition. For this to happen, significant foreign pressure will have to be put on the rebels by the United States and its allies in the region. If not, the new coalition will struggle to unify the rebels in their efforts to oust the Assad regime and the civil war in that country will continue.

More Tough Times for the Japanese Economy (2012-11-12)
Following the recovery from last year’s natural and nuclear disasters, Japan’s economy has once again fallen on tough times and economic growth in the world’s third-largest economy has once again come to a halt. As an increasingly export-dependent economy, Japan has been hit hard by the slowdown in key export markets, particularly East Asia and Europe. As Japan’s domestic market will continue to decline over the long-term, this dependence on exports for growth will increase and this will have massive consequences for Japan’s economy in the coming years and decades.

The Japanese economy contracted by 3.5% on an annualized basis in the third quarter of 2012, a worse performance than had been expected. With Europe in the midst of a severe downturn and with key Asian export markets continuing to weaken, Japan’s export-driven industries struggled in recent months. Moreover, anti-Japanese sentiment in China has damaged trade relations between Asia’s two largest economies, further reducing economic growth in Japan. With key export markets such as Europe and parts of East Asia forecast to remain weak in 2013, the potential for an export-driven recovery in Japan is poor; even as North America’s export markets grow at a healthier pace.

As always, Japan’s shrinking domestic market is a major hindrance to economic growth in Japan. In fact, it is Japan’s demographic decline and the shrinking number of consumers in that country that has been the greatest factor in Japan’s two decades of stagnation. While the Japanese government will likely enact even more economic stimulus programs in the coming months in a bid to boost the domestic market, it is becoming increasingly difficult to generate growth in such a declining home market. This is the lesson that demographically-declining developed markets such as Japan and much of West Europe must face as they confront greater challenges in competing for the world’s export markets as their own domestic opportunities shrink.

Reprinted from ISA Report published December 1, 2012 (updated December 27, 2012), International Strategic Analysis,  
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