Daily Archives: January 4, 2013

A great advantage of predictions is usually that only the author remembers them and then can portentously pull from the hat the one or two which challenged conventional thinking and were proved right. The other bold, but flawed, ideas can be discretely forgotten. So with that premium on shock value, here goes …

Financial opinion, including this newspaper, is visibly breathing a sigh of relief and declaring the corner turned on the eurozone crisis. Mario Draghi is the FT’s Person of the Year and Angela Merkel, one of its Women of the Year. But the fundamentals of southern Europe’s austerity trap and the intractable levels of low growth, unemployment and the social crisis it is creating, are unabated. Greece continues to slip towards ungovernability. Now France looks set to tip economically into the southern European camp. It seems unlikely that Central Bank brinkmanship can hold off economic and political fundamentals indefinitely. The euro remains holed below the water line.

It is hard to argue with the conventional wisdom on the Middle East: It will be a rough year that will trip up President Obama’s much vaunted pivot towards Asia. But beneath the surface of that consensus is even more unpleasant news: the Assad regime in Syria seems to be slipping towards its end but that is likely to lead to more chaos. This is because a military resolution, as opposed to a diplomatic one, will mean a raw and violent power struggle and subsequent period of sectarian retribution. The omens are similarly inauspicious in Iraq and Libya where there seems a high likelihood of increased instability, power struggles and a growing anti-western sentiment.

This is likely to drag the focus of western diplomacy back to the unfinished business of these three struggling countries and away from any renewed concentration on the Israeli- Palestinian conflict or Iran’s nuclear programme. On the latter, those who have declared that one way or another the Iranian nuclear issue would be brought to a head this year may therefore be disappointed.

The IMF has like others jumped on the band wagon of the African growth story noting that ten of the 20 countries in the world likely to have the highest annual growth rates in the next five years are African. It is certainly a more useful lens to look at Africa through than that of poverty and aid failure but it disguises some of the challenges ahead. At least a quarter of Africa’s growth will come directly from energy and minerals and a lot more still from their impact on other sectors. Across the continent, governments and those decent oil and mineral companies with a long term mindset are struggling to contain the dangers of corruption. This resource boom could make, or unmake, the continent.

Across Asia, the economic revolution of recent decades is beginning to turn on its own children. Demographic pressures are fanning old border disputes. Internal income inequalities are exploding leading to widespread social protest. Consumer and dietary changes along with urban growth are aggravating water and food scarcities. The propensity for a natural disasters is growing along with that for man made conflicts.

In Latin America, Hugo Chavez may be on the way out but Chavismo is doing better than Washington commentators hoped. From his Cuban hospital bed he has just won provincial elections. Narcotics and inequality are still undermining the dream of many both in the continent and its US neighbour for a more stable middle class and democratic politics.

Let’s hope these predictions are wrong enough to be soon forgotten by all but their author. In which case may I wish the FT’s readers a Happy and Prosperous New Year.

The writer is chairman of global affairs at FTI Consulting and author of ‘The Unfinished Global Revolution’. He is a former UN deputy secretary-general and vice-chairman of the World Economic Forum

Governments’ policies will lag economic reality – this is the easy part of the prediction for this year. The more difficult is whether policymakers will be forced to deliver better outcomes for citizens, or be able to delay big decisions as was the case in 2012.

As a result of political failure, central banks remained highly activist this year, unveiling measures that would have been deemed unthinkable only a few years ago. Both the US Federal Reserve and the European Central Bank made bold interventions that were critical to maintaining financial stability and fostering some growth, albeit not a lot.

Yet there is only so much they can do. And for two distinct reasons.

First, the tools available to central banks were ill-suited given the enormity of the task at hand. As much as they would like to, central banks could not meaningfully stimulate aggregate demand in economies stuck in liquidity traps. They had no means to improve productivity and competitiveness in economies that, for years, underinvested in their people and infrastructure. And they could not safely deleverage so many over-indebted segments, particularly those lacking direct access to their financing schemes.

Second, the responsiveness of other policymaking entities with much better tools was hampered by politics. Despite some progress, European politicians were unable to converge on a common analysis of the past and a credible vision of the future. This amplified the problems of countries, such as Greece, saddled by growing popular rejection.

In the US, congressional polarisation slowed the basic elements of economic governance, including a three-year failure to approve an annual federal budget. This was aggravated by uncertainties over the fiscal cliff, a self-inflicted wound.

The lack of new policy is why unemployment remains too high in most advanced economies; why debt and deficits are yet to regain medium-term sustainability in several countries; and why income and wealth disparities are excessive.

The urgency and importance of the potential turning point will rise markedly in 2013.

Absent meaningful policy changes, central bank policies will be increasingly associated with mounting collateral damage and unintended consequences. Meanwhile, inadequate growth and high unemployment will stubbornly persist.

Most analysts expect policymakers to do no better in 2013 than in 2012 – namely, defence with only the occasional burst of ineffectual offence. This is a reasonable yet unfortunate expectation.

The writer is the chief executive and co-chief investment officer of Pimco

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