The Financial Times Looks at 2011

Stephen DeAngelis

January 13, 2011

As 2010 came to a close, “a panoply of FT pundits … put their reputations on the line to divine what the new year will offer.” [“Cuts, leaks and atom smashing,” Financial Times, 30 December 2010]. Each pundit answered a specific question (several of which were UK- or European-centric that might not interest global readers); however, most of the predictions answered questions about things that could have significant impacts on the global economy. Looking back at last year’s predictions, the paper notes that its columnists were hit and miss with their predictions (for example, “Martin Wolf rightly predicted the eurozone would not let a member state default” but “Clive Crook thought the Democrats would hold the US House of Representatives”). Martin Wolf answers the first question: Will the euro survive? He writes:

“Yes. Despite the rolling wave of crises in peripheral European countries, the will of members to keep the eurozone functioning has proved strong enough to prevent an outright default, let alone a departure from the currency union. It is probable that defaults will also be prevented in 2011. But, in the longer run, defaults – or, more precisely, debt restructurings – look inevitable, not least because that is what Germany wants to happen. The big question is whether countries that have experienced a public sector default will be prepared to soldier on within the currency union. The costs of departure will certainly be lower in these dire circumstances. If, as seems plausible, the alternative is years of deflation and depression, some countries might choose to leave. But 2011 will not be the moment for that truth. Meanwhile, the euro will surely survive, even in the long run, if in a diminished form, as a union among the economies that are able to live with Germany.”

The question of the euro surviving is important because a failed euro would have serious consequences on any number of contracts that have been negotiated with euros establishing the price point. James Kynge answers the question: Will China’s bubble burst? His response might surprise you. He writes:

“There is no China bubble, so it cannot pop. Some parts of the economy -– property prices in first-tier cities, for example –- are a bit frothy, but the idea of a generalized bubble is folly. Surges in lending in 2009 and 2010 have helped to generate inflation in asset and food prices. Though serious, these will be controlled in 2011. Much lending has been put to productive uses –- not excess. Rural China, with a population of 721m, is rising from relative economic obscurity into a genuine growth driver. A new cohort of 250m to 300m rural discretionary consumers has emerged. The result is not the writing on the wall for China’s boom, but the opening lines of a new chapter in the narrative.”

For more on the future of China, read my post entitled Competing rather than Fighting with China. In that post, I refer to an article by my colleague Tom Barnett in which he asks a more interesting question: Will China grow old before it grows rich. Tom notes that no country has risen and remained at the top of the economic heap as an “old country.” Economic growth requires a vibrant, educated, healthy, and young population. Does that mean that I think China’s bubble will burst? Not necessarily. Kynge is correct that the China’s indigenous population is so large that as consumers they almost guarantee that the Chinese economy will continue to grow. More on that in a future post about what Martin Wolf calls the “great convergence.” David Pilling answers a question about one of China’s neighbors: Will Korea reunify? He writes:

“No chance. Reunification is the most desirable outcome for the Korean peninsula, but the least likely –- for now. Certainly the situation is volatile. Kim Jong-il has begun a potentially destabilizing handover, and Pyongyang has become more aggressive. With things in flux, reunification should be more likely. But Seoul shows little appetite for this gargantuan undertaking. More important, China, which refuses to condemn Pyongyang, continues to back it economically. Beijing appears unwilling to accept the risks of a collapsed North Korea, nor the prospect of a united Korea hosting US troops. Reunification may happen one day. But not in 2011.”

I agree with Pilling. Not only is the political rhetoric rising between the two countries, but South Korean leaders are well aware of the enormous economic price that would have to be paid to bring the North up to speed economically. My guess is that leaders in the South hope that subsequent versions of the “Kims” up North learn lessons from the latest generation of Chinese leaders about how to reform centralized economies by embracing more free market ideas. Until the North makes significant reforms and sees sustained economic growth, my guess is that leaders in the South are more than happy to leave the situation well enough alone. Speaking of governments in need of reform, Roula Khalaf answers the question: Will the Mubarak era end in Egypt? He writes:

“Not if the Mubarak family has its way. Ailing Hosni Mubarak, Egypt’s ruler since 1981, has no intention of relinquishing his job, unless his health demands it. But if he cannot run for re-election in 2011 his ambitious son Gamal may not be able to take over. The favorite of a young, economic reformist wing in the ruling National Democratic Party, Gamal faces resistance from a powerful old guard and the army may not accept him. If the elderly Mubarak is truly planning to install his son, he must engineer the succession in his lifetime. If he is gone, a figure with closer ties to the security establishment is likely to become president. The Mubarak era would then truly end.”

Khalaf has history on his side when predicts that ruling families (or parties) have a difficult time letting loose of the reins of power. One needs only look at China, Myanmar, Venezuela, North Korea, Ivory Coast, Zimbabwe, Kenya, and so on and so on to see how easy it was to predict that the Mubarak era is probably not going to end in 2011. One way or another, however, things are going to change inside Egypt’s neighbor Sudan in 2011. William Wallis answers the question: Will there be civil war in Sudan? He writes:

“At any time conflict rages somewhere in Sudan. January’s long-awaited referendum on the independence of southern Sudan will inflame tensions, but will not lead to full blown civil war. Neither Khartoum nor the former southern rebels wants to reignite Africa’s longest civil war – they depend on each other to produce the oil that bankrolls both regimes. But if, as is likely, the south votes to secede, leaders will not be able to manage expectations or control armed affiliates. The emergence of the world’s newest state will be neither peaceful nor orderly.”

Unfortunately, Wallis is probably correct on all fronts. With the referendum now under way, the results are likely to start a messy, if small scale, conflict. There has already been unrest and bloodshed along the new north/south border. It remains a situation to watch. Speaking of messy, Alan Beattie answers the question: Will the currency wars go nuclear? He writes:

“No, barring renewed global recession – but heavier ordnance may be wheeled into action. After several years when exchange-rate tension was largely a bilateral US-China affair, emerging markets across Asia and Latin America have joined the fray, complaining about their currencies being driven higher. But, rather than China taking all the blame for holding down the renminbi, the US drew at least as much flak for ‘quantitative easing’ pushing down on the dollar. A unified global campaign against China’s currency policy will continue to elude Washington. Instead, the US could finally carry through its long-standing threat to block Chinese imports on the grounds of currency misalignment. While Congress is angry, it is not ready to start a global trade war unless the economy worsens markedly. Any legislation that makes it to presidential signature will have been watered down. Meanwhile, experiments by countries such as Brazil, with restraining inflows of ‘hot money’ are likely to be repeated. But, given their risks and limited effects, a wide-scale return to capital controls is highly unlikely.”

That’s good news — if Beattie is correct. The global economy requires trust — including trust in currencies being proffered for goods and services. Currency stabilization during the coming year could also help normalize global trade. An interesting side note is that New York City branch of the Bank of China is offering accounts that permit customers to buy yuan [“Comes The Revolution; Buy Yuan In New York, As Much As You Like,” by Robert Lenzner, Forbes, 12 January 2011]. This is the next cautious step being taken by Chinese leaders towards making the renminbi an international exchange currency. One question that will have a big impact on both the global economy and trade is: Where will oil finish the year? Sylvia Pfeifer’s answer:

“Looking at the oil markets today, the bulls are making the most noise. Oil demand is set to increase in 2011 – the International Energy Agency has lifted its estimate of global oil demand growth for 2010 to 2.3m barrels a day, the second-highest level in recent history. Stronger economic growth will help underpin that demand. Opec, however, will be under pressure to make sure prices do not go too high and may increase production. 2011 will be remembered as the year when oil prices tipped $100 a barrel – they are likely to finish the year around that level, plus or minus.”

Can the global economy achieve sustained growth with oil loitering around $100/barrel? Probably. Supply chains will undoubtedly be affected as the cost of transporting goods across the world’s oceans increases as will the cost of growing food. Consumers will undoubtedly cringe as gasoline prices remain above $3/gallon and even creep higher. The only winners in this scenario are oil-rich nations that have sound long-range plans for investing petro-dollars. If those dollars are siphoned off by corruption and graft, there will be no winners. Another area in which consumers are likely to feel a pinch globally is the agricultural sector. Javier Blas answers the question: Will there be a global food crisis? He writes:

“Yes. The global bill for food imports will surpass the $1,026bn record of 2008 and prices of several agricultural commodities will also top their previous record. The Food and Agriculture Organization’s benchmark food index will also set a new high. Among key crops, wheat, corn, barley and oilseeds such as soyabean will see large increases; only rice will have limited gains. Behind the spike is a string of supply problems related to bad weather. Demand is also strong, partly boosted by biofuel consumption. But there may be fewer food riots than in 2007-08: African crops have been abundant, shielding poor countries from the brunt of surging prices.”

For more on this topic, read my post entitled Fears Grow Concerning Possible Food Price Increases and click back tomorrow for a post in which I’ll explain the latest concerns about the subject. This is a topic that deserves much more than a short paragraph. Turning from prognostications that could affect the global economy to fundamental science, Clive Cookson answers the final burning question: Will we find the Higgs particle? He writes:

“The Higgs boson, predicted but still unseen, is the most wanted subatomic particle. Scientists believe it underlies the most important property of matter – mass – and its discovery would help tie up several ideas about the laws of physics. So the Higgs is target number one for the world’s most powerful atom smasher, the Large Hadron Collider at Cern near Geneva, which has been running at full tilt for a year. But the world’s second most powerful accelerator, the Tevatron at Fermilab near Chicago, has a head start in collecting data for the Higgs hunt; it could just pip Cern to the prize. Between them, they should record enough collisions during 2011 either to detect the Higgs or to rule out its existence, which would blow the whole theoretical framework of physics wide open. I’ll go for detection.”

You may have never have heard of the Higgs boson, but you probably have heard it referred to as “the God particle.” According to Wikipedia, “The Higgs boson is the only Standard Model particle that has not been observed in particle physics experiments. It is a consequence of the so-called Higgs mechanism which is the part of the Standard Model which explains how most of the known elementary particles become massive. For example, the Higgs boson would explain the difference between the massless photon, which mediates electromagnetism, and the massive W and Z bosons, which mediate the weak force. If the Higgs boson exists, it is an integral and pervasive component of the material world.” As Cookson notes, scientists are eager to eliminate the “if” about the existence of the Higgs boson. If you want to read more about the Higgs boson and why it is important, I recommend reading a number of one-page explanations that can be found by clicking on the link.

 

Turn in again next year around this time to see how well the Financial Times writers did with their predictions.