New Middle East Peace Talks (2010-09-01) While a new round of peace talks between the Israelis and the Palestinians is getting underway in the United States, expectations for a comprehensive peace deal in the Middle East are very low. In fact, US President Barack Obama is certain to find strong opposition to such a deal within significant elements on both sides, making the prospects for a meaningful deal very unlikely. Moreover, the region’s dynamic is changing, making the prospects for peace unlikely and strengthening hardliners on both sides. These peace talks in Washington will be the first direct negotiations between Israeli and Palestinian leaders in nearly two years, reflecting the poor state of relations between the two sides following Israel’s short war in Gaza in late 2008. The United States hopes that these talks can rebuild momentum towards the establishment of a two-state solution to the Palestinian issue. However, hardliners in the right-wing Israeli government have vowed to bring down the government if it makes any meaningful concessions to the Palestinians. Meanwhile, President Abbas’ Fatah movement has been driven out of the Gaza Strip and struggles to offset the popularity of Hamas in many areas of the West Bank, weakening its ability to speak for all Palestinians. While these internal factors bode ill for these peace talks, there are also a number of external factors that could derail the prospects for peace in the region. First, Iran’s influence in the eastern Mediterranean continues to grow through its proxy, Hezbollah, in Lebanon, and this development is strengthening hardliners in Israel. Second, Israel’s relations with its key ally in the region, Turkey, have deteriorated sharply and this is enhancing Israel’s sense of isolation in the region. Finally, the United States’ struggles to convince the Israeli government to halt its construction activities in East Jerusalem and the West Bank have cost the US some of its credibility among the Palestinian leadership, damaging the US’ ability to force both sides to make concessions.

India Keeps Growing (2010-09-01) While giant economies such as the United States and China realized a slowdown in economic growth in the second quarter of 2010, India’s economic growth continued to accelerate, raising hopes that India can maintain these high rates over the long term. These hopes have been raised by India’s relative lack of exposure to the impact of the ongoing slowdown of the global economy, with India’s expanding domestic market driving this recent economic surge. Nevertheless, Indian policy makers will have a number of risk factors to deal with in the months ahead that could negatively impact India’s economic performance. India’s economy expanded by 8.8% on an annualized basis in the second quarter of 2010, its best performance in the past two-and-a-half years. This strong growth was the result of a sharp increase in industrial and mining output during this period, with India’s industrial output growing by more than 12% and its mining output rising by almost 9%. In addition, India’s vital services sector also grew at a healthy pace in the second quarter of the year. Meanwhile, as exports make up a relatively small portion of India’s economy, the slowdown in many key export markets had only a minor impact on India’s economic performance. Looking ahead, India is forecast to continue to record strong high levels of economic growth over the remainder of this year. First of all, domestic demand levels are forecast to grow at a strong pace as India’s middle class continues to expand. In addition, India’s agricultural sector is forecast to perform well, unlike last year when late monsoon rains had a negative impact on agricultural output, a key factor in 2009’s slowdown in India. One key risk facing the Indian economy in the months ahead is inflation, with India’s inflation rate exceeding 11% year-on-year in recent months, a factor that could dampen consumer demand levels in India. If inflationary pressures exceed forecasts in the coming months, India’s economic growth rates will fall from their current highs.

A Hung Parliament in Australia (2010-08-25) Australia’s parliamentary election resulted in neither the governing Labor Party nor the opposition Liberal-National alliance winning a majority of the seats in the parliament, allowing four independent members of parliament to play the role of king-makers in the creation of a new government. As a result, even when a new government is eventually created, it will struggle to enact major legislation and could prove to be short-lived given the divided nature of the new parliament. Moreover, there are a number of divisive issues that could lead to gridlock in the Australian parliament in the years ahead. Both the center-left Labor Party and the center-right Liberal-led alliance fell a few seats short of winning a majority in the Australian parliament, resulting in Australia’s first hung parliament since 1940. This result was a bitter disappointment for the ruling Labor Party that jettisoned its leader, Kevin Rudd, just weeks before the election and replaced him with Julia Gillard, who served just one month as prime minister before the election. As a result, four independent members of parliament who have leaned to the political right in the past hold the key to the creation a new government that will need their support to remain in power. Whichever party is able to form the next government in Australia will face a number of critical issues that could prove highly divisive for such a split parliament. First, economic policy will be a crucial issue, with each of the independent king-makers demanding that the management of Australia’s fiscal budget take priority in the next government. This will also include the controversial mining tax that was proposed by the previous government that has threatened what has been the most successful sector of the country’s economy in recent years. In addition, environmental legislation remains in limbo following the previous government’s failure to keep its promises for stricter regulations in this field. What is certain is that passing legislation will be a difficult task in the years ahead, with any future government struggling to maintain its grip on power.

Bad Economic News from Japan (2010-08-16) Japan’s economic growth slowed much more sharply than had been anticipated in the second quarter of 2010, offsetting more positive news from Germany and raising concerns about the state of the Japanese (and the global) economy in the second half of this year. Moreover, the factors that led to this slowdown in the Japanese economy are also present in many other key economies around the world, suggesting that Japan’s woes could be realized in many other countries in the coming months. This added to the concerns over the risk of a double-dip recession in many key economies before the end of this year. Japanese GDP growth slowed to just 0.4% on an annualized basis in the second quarter of 2010, a sharp decline from the 4.4% GDP growth recorded in the first quarter of the year. As usual, Japan’s domestic market remained weak as consumer demand slumped during this period and deflationary pressures remained well entrenched. Meanwhile, export revenues failed to meet expectations as key export markets weakened and the yen strengthened against many other major currencies. Despite these factors, the Japanese government indicated that its focus would remain on cutting spending to reduce Japan’s massive debts, so no new economic stimulus programs are likely to be forthcoming. Many of the factors that led to this slowdown in Japan are present, or will be present, in many other large economies, signaling the heightened risk of a severe downturn in global economic growth in the months ahead. For example, consumer demand is flagging in many key economies such as the United States, weakening domestic growth and squeezing key exporting economies such as Japan. Furthermore, governments around the world are focused on reducing debt levels and improving their budget balances, so economic stimulus programs are being withdrawn, lowering public spending levels just as in Japan. As a result, Japan’s second quarter slowdown is likely to be following by similar slowdowns in many key economies in the second half of this year.

Food Price Fears (2010-08-08) After reaching record levels in 2008, food prices fell over the past two years as a result of the impact of the global economic crisis and an improvement in the output levels of many key crops. However, food prices have begun to rise again in recent months and there are signs that even higher food prices could be on the horizon for much of the world. As a result, there are new fears that rising food prices could trigger inflationary pressures around the world, particularly in the world’s poorest countries. Rising demand for food, particularly in emerging markets, has led to sharp price increases for a number of types of food in recent months. Moreover, the ongoing drought and heatwave in Russia and other parts of Eastern Europe has led to a massive increase in wheat prices in recent weeks, especially after the Russian government issued a ban on all wheat exports. Elsewhere, adverse weather conditions have had a negative impact on many of the world’s leading agricultural producers this year, leading to renewed supply-side fears in the food industry. If the output levels for many key crops continue to fail to meet expectations in the months ahead, food shortages such as those witnessed in 2008 could once again become a reality. In particular, emerging markets where population growth is exceeding agricultural output growth will be particularly vulnerable to the threat of food shortages, leading to soaring inflation rates that will slow economic growth in these countries. While inflationary pressures are not forecast to pose as great of a threat to the world’s leading developed economies, a sharper-than-expected increase in inflation rates would nevertheless hinder these economies’ efforts to recover from the recent global economic crisis and could contribute to a double-dip recession in many countries.

The Threat of Pakistan (2010-08-03) While the situation in Afghanistan is causing the United States and its allies a range of problems, it is neighboring Pakistan that is the greatest through to regional and global security at the moment. As a nuclear-armed state with a population approaching 180 million people, unrest in Pakistan has a major impact on the stability of all of Central and South Asia as well as on many of the world’s leading powers such as the United States and China. Unfortunately, the prospects for peace and security in Pakistan are dimming as a number of factors are endangering what stability still exists in that country. Internally, Pakistan faces a myriad of challenges that threaten to tear the country apart. First, Pakistan’s population is growing very rapidly and is incredibly diverse, with numerous ethnic and religious groups often at odds with one another as well as with the government in Islamabad. Second, Pakistan’s central government is very weak and has struggled to gain control over the country’s armed forces and intelligence services, as evidenced by the uneven response to the threat of militant groups in northwestern Pakistan and in neighboring Afghanistan. Finally, Pakistan’s economic outlook is poor due to a lack of foreign investment and rapidly dwindling resources, particularly water. Many countries face similar challenges as those confronting Pakistan, but few are involved in such a wide range of disputes with their neighbors and well as with countries further abroad. The most important dispute is with India, Pakistan’s giant neighbor whose rising power is causing great consternation in Pakistan and is leading Pakistan to develop closer ties with China in a bid to offset India’s huge advantages over Pakistan. Meanwhile, Pakistan’s close ties with the Taliban and its role in the ongoing war in Afghanistan has done much to destabilize the situation in both of those countries. With domestic stability likely to remain elusive, Pakistan is likely to continue to play a destabilizing role in the region, forcing a prolonged involvement in the region by powers such as the US and China.