No Winners in the Greek Debt Crisis (2012-01-25) As negotiations between the Greek government, the international community and the holders of Greek public debt drag on, one thing is clear; no one will emerge as a winner from this crisis. Moreover, it appears that most of the major players in this crisis have given up hope that the Greek economy can be rescued and are focusing their efforts on ensuring that Greece’s collapse will not lead to contagion across the rest of Europe. Nevertheless, Greece holds significant risks for Europe and the rest of the global economy, as 2012 will be the pivotal year for the European debt crisis. Regardless of what deal is eventually reached in the ongoing Greek debt talks, there will be great economic losses suffered by all of those involved in this crisis. The most obvious loser is Greece itself, which remains in a deep recession and which has seen any hope for a swift economic recovery dashed, raising fears that Greece will slip from the ranks of the world’s developed economies. Furthermore, other economies in Europe remain at risk from Greece’s eventual default on its debts as this could lead to more defaults across Europe. Finally, it is becoming clearer that the 50% reduction in the face value of Greek bonds that was agreed to earlier is not enough and that holders of Greek bonds will be forced to accept a much larger haircut. As Greece collapses, the focus must be on preventing this collapse from toppling other weak economies in Europe, most notably Italy. Initially, a Greek default will likely lead to soaring bond yields for other debt-laden European economies such as Italy, Portugal and Spain. Italy, in particular, faces a daunting challenge as a Greek default is set to occur just as it faces three months of huge debt repayments between February and April 2012. If a Greek default rattles the markets too much, Italy and other European countries may not find takers for their debt, regardless of the bond yield. This would lead to a serious recession in Europe and could result in the eventual collapse of the euro.

Egypt - One Year After the Revolution (2012-01-25) Egyptians have been marking the one-year anniversary of the popular uprising that led to the ousting of President Hosni Mubarak and the transition to a democratic system of government. While many Egyptians are hopeful that democracy can provide their country with a better future, many are also concerned about the prospect that democracy will not be able to take root in their country. Moreover, concerns about the impact of the political uncertainty on Egypt’s economy are on the minds of most Egyptians and this will have a major influence on the country’s political direction. In the year since the revolution that toppled the government of President Hosni Mubarak, much has changed on Egypt’s political scene. Of course, the Egyptian military continues to exercise significant influence on Egyptian politics and may yet move to ensure that it maintains a leading political position in the future. However, the first-ever free and fair parliamentary elections in Egypt have taken place and they have given Islamist parties a dominant position in the new parliament. With power now resting in the hands of the military and the Islamists, there are legitimate fears that Egypt’s democratic experiment will be short-lived. One aspect that has not received enough attention with regards to Egypt’s future is the state of the Egyptian economy. During the final years of the Mubarak regime, Egypt’s had one of the best-performing economies in the Middle East, with GDP growth averaging 6.2% in the five years before the revolution. However, last year’s uprising and the continuing political uncertainty in Egypt has had a major impact on the Egyptian economy and has led to reductions in foreign investment and tourism revenues. If the Egyptian economy fails to return to pre-uprising levels, enthusiasm for democracy could wane, making it difficult for Egypt’s next government to maintain control in this highly fluid political situation.

Taiwan's Election and its Impact on Relations with China (2012-01-18) Taiwan’s President Ma Ying-jeou was re-elected two a second term in office in last weekend’s presidential election in Taiwan. His re-election was hardly a certainty as polls taken before the election suggested that it would be a tightly contested election. Nevertheless, President Ma was able to win by a healthy margin over his rival Tsai Ing-wen, bringing the potential for more political stability to Taiwan. Moreover, President Ma’s re-election is likely to have a positive impact on relations between China and Taiwan. President Ma was re-elected to a second term in office in a presidential election that was not as close as had been expected. President Ma won 51.6% of the vote, outdistancing the candidate of the opposition Democratic Progressive Party (DPP), Tsai Ing-wen, who won 45.6% of the vote. Meanwhile, the last-minute candidacy of President Ma’s former partner in the ruling Kuomintang party, James Soong, was expected to take votes away from the president, but in the end, Mr. Soong managed to win just 2.8% of the vote. Furthermore, the Kuomintang retained their majority in the parliament, albeit with a smaller number of seats than they had held before these latest elections. The re-election of President Ma was certainly welcomed by China, which was concerned that a victory by the pro-independence DPP could dramatically increase tensions between China and Taiwan. With China undergoing a major leadership transition later this year, the last thing that it wanted was to face renewed calls for Taiwan to declare itself an independent state. With the Kuomintang once again firmly in power in Taiwan, it is likely that cross-strait economic ties will continue to grow, and that political differences will remain to the side in the coming years. Nevertheless, China’s desire to eventually re-annex Taiwan will continue to loom over Taiwan in the coming years, dominating political and economic policy in Taiwan, regardless of which party is in power there.

Chinese Economic Growth Continues to Slow (2012-01-17) As expected, economic growth in China continued to trend downwards in the final months of 2011 as domestic demand cooled and as key export markets experienced significant turbulence. Nevertheless, the performance of the world’s second-largest economy in the latter part of 2011 was slightly better than expected and this will boost exporters’ confidence as China is expected to again be a key engine for global trade and investment in 2012. Looking ahead, growth will continue to trend downwards over the near-term, but a hard landing in China appears unlikely. Chinese GDP growth slowed to 8.9% on an annualized basis in the fourth quarter of 2011, the first time that Chinese economic growth fell below nine percent in more than two years. As a result, Chinese GDP growth for the entire year in 2011 was 9.2%, down from the 10.3% GDP growth recorded in 2010. In the last three months of 2011, a slowdown in both domestic and export demand contributed to this lower rate of economic growth. Domestically, weakening of the country’s real estate sector continued, dampening economic growth in many areas of the country. At the same time, export growth slowed in late 2011 as demand in many key markets, in particular Europe, weakened. In 2012, Chinese economic growth is likely to slow further, especially in the first half of the year. Our current GDP growth forecast for China calls for 8.9% growth in 2012 and 8.7% growth in 2013. Domestically, China’s real estate sector is likely to weaken further, reducing a key pillar of growth for China in the process. However, this will be offset by the continued expansion of the Chinese middle class and the easing of inflationary pressures that will help to boost consumer spending on the domestic market. Export growth will also slow over the near-term as key export markets remain weak and as foreign competition, particularly for low-cost manufactured exports, intensifies.

The Latest Economic Signals (2012-01-14) As expected, most of the initial economic signals to emerge from the final months of 2011 have shown that the world economy is definitely slowing. Nevertheless, there have been some positive signals to emerge in recent days, suggesting that, at least for the final quarter of 2011, this global slowdown will not have been too severe. Meanwhile, many important questions remain to be answered in 2012, particularly those involving Europe’s ongoing debt crisis, and this uncertainty is continuing to concern businesses and investors. The economic data that has emerged from the world’s leading economies has suggested that the global economy continued to slow in the fourth quarter of 2011. While the United States economy appears likely to have grown by more than 3.0% in the fourth quarter, growth has certainly slowed in other key economies such as China and Europe. In China, export growth slowed sharply in late 2011, as did import growth, a worrying sign for exporters increasingly dependent upon China for growth. Meanwhile, Europe’s economy is certainly entering a recession, although a weaker Euro has boosted export growth in Germany and other northern European export-based economies. Because of the lingering uncertainty over the outcome of Europe’s debt crisis and the potential threat for a more significant slowdown in the world’s leading emerging markets, the outlook for 2012 remains unclear. Certainly, economic growth rates will remain restrained in the first half of the year, with much of Europe remaining in a recession and US growth likely slowing. However, if Europe’s debt crisis can be contained to southern Europe, and if emerging market consumers boost their spending, growth could accelerate in the second half of the year, allowing the global economy to avoid a prolonged slowdown. However, the risk of a longer and deeper slowdown will remain in place and could be triggered by any number of events in the coming year.

Can Iraq Hold Together? (2012-01-10) Since the withdrawal of US forces in late 2011, Iraq has experienced a surge in sectarian violence and seen tensions between that country’s three main groups rise to dangerous levels. As a result, there are fears that Iraq could descend into a spiral of violence such as that which took place in the years following the US-led invasion of Iraq in 2003. Moreover, this growing unrest in Iraq has the potential to involve other countries in the Middle East, potentially destabilizing that already volatile region. With the last United States combat forces having withdrawn from Iraq in late 2011, the responsibility for maintaining stability and security in that highly divided country has fallen to the Iraqi government. However, initial signs point to the inability of the Iraqi government and its security forces to prevent sectarian violence from escalating. Moreover, it is the three main factions (Shiite, Sunni and Kurdish) within the government that are largely responsible for this latest increase in sectarian tensions. With the United States no longer having the leverage it once had to force these factions to work together, there is a strong possibility that Iraq’s fragile unity could dissolve in 2012. The fact that Iraq is a major player at a vital location in the Middle East means that any escalation in violence in Iraq has the potential to draw in outside actors. For example, Iran’s support for Iraq’s Shiite majority has given Iran significant influence in Iraq and it stands to gain the most from Shiite dominance of Iraq. Meanwhile, two other major powers in the region, Turkey and Saudi Arabia, both have major interests in Iraq and are likely to move to thwart any increase in Iranian influence there. Finally, the United States retains significant military forces in the region around Iraq and should the situation deteriorate significantly, it could send back armed forces to Iraq to attempt to restore order in that country.

The Outlook for the US Economy (2012-01-04) While much of the world’s attention has focused on the ongoing debt crisis in Europe, the world’s largest economy, the United States, is set to record steady, if unspectacular, growth in 2012. While the US will outperform most other developed economies in 2012, it will not grow at a fast enough pace to significantly reduce the US’ high rate of unemployment. Moreover, a number of risks, both internal and external, could hinder the US’ economic growth over the course of the year. ISA is forecasting growth of 2.1% for the United States economy in 2012, in line with the forecasts of most other leading economic research organizations. While growth in the first half of 2012 is forecast to fall from its highs of late 2011, the second half of this year is expected to see an increase in economic output as the US housing market begins to recover and as export prospects improve. Nevertheless, economic growth will need to be higher than this forecasted rate for unemployment to fall and as a result, we are forecasting only a slight decline in the unemployment rate over the course of 2012. Meanwhile, the United States economy faces serious threats, both from inside the US and from abroad. Domestically, the largest risk to the US economy remains the inability of the country’s political leaders to agree on a strategy for solving long-term debt and deficit issues facing the US. With the November 2012 presidential election still ten months away, little is likely to be done on this front for the better part of this year. Meanwhile, the US is not immune to the severe debt crisis in Europe that could severely weaken US exports to Europe and have a major impact on the entire world’s financial system. Moreover, emerging markets such as China, India and Brazil are threatened with an economic slowdown that could reduce US exports to these increasingly important markets.

Iran's Critical Year (2012-01-03) 2012 could be a year of massive change in Iran. On the international front, Iran faces increasing pressure as a result of the continuation of its nuclear program in the face of global opposition. Fears over the possibility that Iran is developing nuclear weapons could lead to Iran going to war with a host of countries, including the United States, Israel or a number of Arab states in 2012. Meanwhile, Iran faces a host of internal political and economic challenges that could also result in a change of leadership in that country or a new outbreak of internal unrest. 2012 is rightly viewed as the crucial year in the international community’s response to the likelihood that Iran is continuing to pursue the development of nuclear weapons. Israel, despite some degree of opposition from the United States government and military, is clearly weighing a potential series of military strikes on Iran’s nuclear facilities. Such a move could prompt Iranian strikes against Israel, as well as against oil facilities in the Persian (Arabian) Gulf and a blockade of the Strait of Hormuz. This type of escalation would certainly drag the United States and potentially Saudi Arabia into a direct conflict with Iran, an event that would have major consequences for the world economy, not to mention stability in the Middle East and Central Asia. While Iran’s international disputes are well covered, less well covered are the internal divisions within Iran that are threatening to lead to major instability within that country. First, large segments of Iranian society remain committed to political and social reform in the face of staunch opposition from the conservatives that currently dominate Iranian politics. However, this conservative elite is also increasingly divided, as evidenced by the growing rift between the country’s Supreme Leader Ayatollah Khamenei and President Mahmoud Ahmadinejad. Moreover, international sanctions have had a major impact on Iran’s economy and this too is raising tensions within Iran as the country’s economy weakens.

Key Political Risks for 2012 (2011-12-21) War in Iran: The likelihood of an Israeli attack on Iran’s nuclear facilities has risen in recent months and will continue to do so in 2012. Such an attack will lead to Iranian retaliation against Israel and against other Middle Eastern countries. This could lead to Iran moving to destabilize countries such as Iraq, Lebanon and Bahrain, while promoting unrest in Saudi Arabia. Moreover, oil supplies from the Persian (Arabian) Gulf could be cut off by Iran, adding to 2012’s economic misery. North Korean Provocations: The death of Kim Jong-il has led to a leadership transition to his son, Kim Jong-un. However, the new leader will have to rely on the military for support, as it is now the true power in North Korea. If previous leadership transitions in North Korea are anything to go by, expect North Korea to militarily provoke South Korea and its allies in 2012. Dangerous Pakistan: Sectarian and political violence is likely to escalate in Pakistan in 2012. Meanwhile, Pakistan’s relations with its neighbors will be tense, with both India and Afghanistan accusing Pakistan of destabilizing their countries. Furthermore, US-Pakistani relations are unlikely to improve next year, despite the US’ need for Pakistani support in Afghanistan. This could push Pakistan into the arms of China. The Arab Spring’s Second Year: While Tunisia has shown that the transformation from a dictatorship to a democracy can be done peacefully, the situation in other countries impacted by the Arab Spring (Egypt, Libya, Yemen, etc.) has shown that this transformation can lead to instability as various interest groups jockey for power. Meanwhile, Islamist political parties are set to be the big winner in this transformation. European Unity in Jeopardy: The ongoing debt crisis in Europe has exposed deep cracks in the region’s unity. The two main divisions are between export-driven northern European economies and rapidly weakening southern European economies, as well between countries committed to European integration and those opposed to such integration (led by Britain). Meanwhile, fringe parties are benefiting from the opposition to the region’s severe austerity measures. Showdown in Venezuela: Venezuela’s left-wing President Hugo Chavez faces two crucial battles in 2012. First, his battle with cancer has raised questions regarding whether or not he is fit to seek re-election in 2012. Second, a rejuvenated political opposition in Venezuela is hopeful that it can win power in October 2012’s presidential election, although it remains to be seen if Chavez and his supporters would accept an election defeat.

Key Economic Risks for 2012 (2011-12-18) Eurozone Defaults: Greece has already defaulted on its debts and a host of other Eurozone economies are facing a similar fate in 2012. Most importantly, Italy and Spain are already experiencing borrowing costs that are unsustainable, particularly with their debt repayment levels soaring in early 2012. If either defaults, Europe’s banking sector will be devastated, while the repercussions will be global in scale. European Recession: Much of Europe is headed for a recession in 2012. Southern Europe will remain mired in a deep recession that will last for a long period as severe austerity measures are enacted across that region. Meanwhile, Northern Europe’s short recovery from its last recession has come to an end and a fall in exports could lead to a more severe recession than is expected. Sharp Slowdown in China and India: The world’s two largest emerging markets have been providing much of the growth for the world’s exporters in recent years, but both economies are continuing to slow. While inflationary pressures should ease in both countries in 2012, domestic demand is likely to continue to weaken over the near-term, while export demand will be impacted by the slowdown of the global economy. Political Gridlock in the United States: The single greatest threat facing the world’s largest economy is the potential for political gridlock to prevent the US from dealing with its mid- to long-term debt and deficit challenges. This gridlock is almost certain to remain in place in 2012 as Democrats and Republicans prepare for next year’s elections. Stagflation: While inflationary pressures eased in many areas of the world in 2011, inflation rates remain above their recent levels and could rise again in 2012, despite the negative outlook for the global economy. In particular, food and energy prices could soar again in 2012, creating a situation where inflation is rising as growth is falling. Credit Crunch: Europe’s debt crisis has already led to sharp reductions in credit being offered by the world’s financial institutions and this could worsen in 2012 as the crisis in Europe spreads. Together with austerity measures underway in many of the world’s key economies, this threat of a credit crunch is the leading threat to global economic growth over the mid-term.