Stratfor’s Annual Global Forecast for 2011
FORECASTS & TRENDS E-LETTER
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Since January is the month for forecasts, today I present you with Stratfor’s global forecast for the New Year which was just released last week. Due to the length of the report, I could not reprint all of it below, but all of the main points are included. I trust you’ll find this forecast very interesting, and as always, I thank Stratfor for allowing me to reprint some of their work from time to time. I highly recommend that you subscribe at Stratfor.com to stay a step ahead of world events.
January 12, 2011 | 1308 GMT
The year 2011 is one of preparation and postponement, as Washington, Beijing and Moscow — among several others — are already looking to elections and leadership changes in 2012. The uncertainty of next year affects the actions of this year.
One of the biggest questions in 2011 concerns Iraq. The United States is officially obligated to complete its withdrawal of combat troops from Iraq by the end of this year, a move that could reshape the balance of regional power. If the United States withdraws, it leaves Iran the single most powerful conventional force in the region, and leaves Iraq open to Iranian domination. The ripple effect alters the sense of security for the Saudis and other Arab regimes, forcing them to accommodate a more powerful Iran. This effectively ends the balance of power in the Gulf region, something that Washington can little accept.
If Washington does not carry out a meaningful withdrawal, then Iran retains the option of stirring up militias and unrest in Iraq, increasing conflict and the attendant U.S. casualties, all while the U.S. presidential election season begins ramping up. From the political perspective, this is not acceptable. From the geopolitical perspective, allowing Iran (or any other single power) to dominate the region is unacceptable. We think the latter will take precedence over the former, and the United States will seek to retain a strong presence in Iraq rather than withdraw from the region. However, the United States is not likely to carry out any major military action against Iran.
That leaves one path if the United States wants to get out of Iraq at some future point: an accommodation (even if quiet) with Iran to ensure both U.S. and Iranian interests. While it is not likely to be very public, we expect a significant increase in U.S.-Iranian discussions this year toward this end.
While Washington looks to extricate itself from Iraq without leaving power in the region unbalanced, farther east China is struggling with its own economic imbalances. STRATFOR has long been perceived as bearish on the Chinese economy. We are less bearish than realistic, and the reality is that the longer an economic miracle continues to be miraculous, the more likely it is to end its amazing run. We cannot help but notice the similarities between China and its East Asian economic predecessors: Japan, South Korea and the Southeast Asian “Tigers.” The Chinese have shown great resilience, but the global economic crisis revealed the weaknesses of China’s export-based model. While government investment now makes up the lion’s share of the Chinese economy, Beijing is walking a very difficult path between rampant inflation and rapid economic slowing.
As China’s leaders search for a solution and try to avoid the social consequences of a slip in either direction, they are also focused on the next major generational leadership transition, slated to begin in 2012. This discourages any radical or daring economic policies, and stability will remain the watchword as the politicians jockey for position. But given the status of the Chinese economy, and the continued effects internationally of the global slowdown, daring policies and ideas are perhaps what China needs. While Beijing is likely to procrastinate in making any radical economic policy changes, and thus avoid the likely short-term chaos that could entail, the longer the leaders delay fundamental action, the worse things may be when the system starts to unravel.
Meanwhile, Russia will continue to attempt to roll back U.S. influence in Eurasia and solidify its own. Russia has largely completed its retrenchment to the borders of the former Soviet Union, with the notable exception of the Baltic states and to a lesser extent the Caucasus, and Moscow is now secure enough to shift from its more assertive stance to one that appears more conciliatory. This new strategy will play to all its relationships around the world, but will be effective in moving Russia’s influence farther beyond its former Soviet sphere and into Europe — where the United States has been dominant since the end of the Cold War. Russia’s focus this year is to mold understandings with states like the Baltics, while entrenching its strong relationship with Germany. Moscow knows that its time to act freely is ticking down as Russia watches the United States wrap up some of its commitments in the Middle East, but Moscow will also be looking internally, as the political elite position themselves ahead of the 2012 elections.
Middle East/South Asia
The most important question in the Persian Gulf is the degree to which the United States will draw down its forces in the region. The answer to this question determines the region’s geopolitical reality.
Other than the United States, the greatest military power in the Persian Gulf region is Iran. Whether or not Iran acquires nuclear weapons, it is the major conventional power. Should the United States remove all effective military force in Iraq and limit its forces in Kuwait, two things would happen. First, Iraq would fall under Iranian domination. Second, the states on the Arabian Peninsula would have to accommodate the new balance of power, making concessions to Iranian interests.
Should the United States not remove its forces from the region, Iran would have the option of launching guerrilla operations against U.S. forces, using its surrogates in Iraq. That would escalate casualties in Iraq at a time when the U.S. presidential campaign would be getting under way. The core prediction STRATFOR needs to make for the region, therefore, is whether the United States will withdraw its forces. We do not believe a withdrawal is likely in 2011…
The chance of surgical strikes targeting Iranian nuclear facilities is very low, inasmuch as the Iranian response would be to attempt to block the Strait of Hormuz. While it is possible for the U.S. Navy to keep the strait clear, it cannot control the market reaction to military activity there. The consequences of failure for the global economy would be enormous and too great a risk without a much broader war designed to destroy Iran’s conventional forces (naval, air and land) from the air. This could be done, but it would take many months and also run huge risks.
Given that the United States will not completely withdraw and will not launch a major military strike unless pressed by unforeseen circumstances, it is likely that the United States will reach out to Iran — either the government or significant factions within it — in order to reach some sort of accommodation guaranteeing U.S. interests in the Persian Gulf and Iranian interests in Iraq. These talks will likely be a continuation of secret talks held in the past, and if an accommodation is reached, it might be informal in order to minimize political repercussions in both countries.
In Turkey, 2011 is an election year, with parliamentary elections scheduled for June. The ruling Justice and Development Party (AKP) is unlikely to lose the election overall, but the vote will highlight the core secular-religious divide within Turkey. As it seeks to consolidate itself at home, the AKP in 2011 will work toward a more coherent foreign policy, trying to learn from past efforts that had unexpected results.
Egypt begins the year with the successors of ailing 82-year-old Egyptian President Hosni Mubarak at odds over the pending transfer of power. The various factions — both in his National Democratic Party and the army — do not agree on who can best ensure regime stability and policy continuity once Mubarak is no longer in a position to lead. Another complication is that the presidential election is scheduled for September, and it is not clear whether Mubarak will run for a sixth five-year term. While the various elements that make up the state will be busy trying to reach a consensus on how best to navigate the succession issue, several political and militant forces active in Egypt will be trying to take advantage of the historic opportunity the transition presents…
In Israel, concerns remain about Hezbollah, the most serious threat Israel faces. But Hezbollah is focused on matters in Lebanon, and Syria has its own interests at stake, so another major Israel-Hezbollah war in 2011 is unlikely. In Gaza, on Israel’s southern flank, things are not quite as stable. Hamas has an interest in maintaining a short-term truce with Israel, but pressure from competing Islamist movements and Israel’s ongoing efforts to prevent Hamas from strengthening will likely lead to clashes within the year, though not to the extent seen in 2008-2009.
In Afghanistan, the U.S.-led International Security Assistance Force (ISAF) saw some successes on the battlefield in 2010, and more can be expected in the year ahead. However, the ISAF has neither the troop strength nor the staying power to truly defeat the Taliban through military force alone. The success or failure of the counterinsurgency-focused strategy therefore rests not only on the military degradation of the Taliban, but also on the ability to compel the Taliban to negotiate some degree of political accommodation. Some movement toward a negotiated settlement this year is possible, and Pakistan will try to steer Washington toward talks (in the hopes that Islamabad will be able to influence the eventual outcome of those talks), but a comprehensive settlement in 2011 seems unlikely at this point.
The Global Economy
The United States will experience moderate to strong growth in 2011. Unlike in other major economies, consumer activity comprises the bulk of the U.S. system — some $10 trillion of the $14 trillion total. That $10 trillion is approximately half of the global consumer market. (The combined BRIC states — Brazil, Russia, India and China — account for less than one-third of that amount). As the U.S. consumer goes, so goes the world.
When measuring what the U.S. consumer is going to do, STRATFOR consults three sets of data: first-time unemployment claims (our preferred method for evaluating current employment trends), retail sales (the actual consumer’s track record), and inventory builds (an indicator of whether or not wholesalers and retailers will be placing new orders, which in turn would require more hires). As 2011 begins, the first two figures look favorable to economic growth, while the last indicates employment may be slow to recover.
STRATFOR pays close attention to two other measures on the economy: The S&P 500 Index indicates investors’ risk appetite, and total bank credit as made available by the U.S. Federal Reserve indicates how functional the financial system is. Because the 2008-2009 recession was financial in origin, STRATFOR pays particular attention to what investors and banks are doing and thinking. Both measures are strongly positive as 2011 begins.
But while the United States may be gearing up for a strong performance, the same is not true elsewhere in the world.
Europe faces a structural problem. The euro was designed for and by the Germans, who want a strong currency and high interest rates to keep inflation in check and to attract the capital required to maximize their high value-added system of first-rate education and infrastructure. The Southern Europeans, in contrast, have economies that do not add nearly as much value. They must remain price competitive to generate growth, and the only reliable means they have of doing that is to sport a weak currency. Put simply, people will pay more for a German car, but they will only pay so much for a Spanish apple.
Yet these economies (and others) are enmeshed into the eurozone. The financial crisis is depressing the euro, which would normally help the southern European states, but Germany’s presence in the eurozone is acting as a sort of life preserver, limiting how far the common currency can sink. The result is a midground currency, prevented from falling to levels that would actually stimulate the south while holding at weaker levels that make the already competitive Germans hypercompetitive. The result will be growth bifurcation, with the Germans experiencing their fastest growth in a generation, and Southern Europe — the region that needs growth the most to emerge from the debt maelstrom — mired in recession.
Consequently, the financial crisis that started sweeping Europe in 2010 is far from over, and STRATFOR forecasts that more states will join Greece and Ireland in the bailout line in 2011. In one bit of good news for the Europeans, STRATFOR projects that the systems the Europeans built in 2010 to handle the financial crisis will prove sufficient to manage Portugal, Belgium, Spain and Austria, the four states facing the highest likelihood of bailouts, respectively.
In Asia the picture is more familiar. Japan has largely removed itself from the scene. Japan’s population has aged to such a degree that consumption is expected to shrink every year from now on, while its national budget is now majority funded by deficit spending. Luckily for the rest of the world, Japan’s debt is held almost entirely at home, and its economy is the least exposed to the international system of any advanced nation. Japan will rot, but it will rot in seclusion.
In China, nearly every government throughout its history has at some point been brought down by social unrest of some kind. Recently, Beijing was concerned that rolling back stimulus policies enacted in late 2008 would put economic growth at risk, and with it employment. STRATFOR has learned that, given these circumstances, Beijing has decided to keep that stimulus intact. This will solve the employment problem, but it comes at the certain price of higher inflation. China’s challenge in 2011 will be to maintain sufficient services and subsidies to keep social forces in check at a time when the country’s economic model will exacerbate inflationary problems.
Former Soviet Union
Russia’s consolidation of influence in the former Soviet Union is nearly complete, and in 2011, Moscow will feel secure enough in its position to shift from a policy of confrontation with the West to one characterized, at least in part, by a more cooperative engagement. Russia will play a double game, ensuring it can reap benefits from having warm relations with countries — such as investment and economic ties — while keeping pressure on those same countries for political reasons.
The most complex relationship will be with the United States, as many outstanding issues remain between the two powers. However, Russia knows that the United States is still bogged down in the Middle East and South Asia, so there is no need for a unilaterally aggressive push on Washington.
The most productive relationship will be with Germany. Moscow and Berlin will strengthen their ties politically, economically and financially in the new year. But, as throughout history, their inherent mistrust for one another will motivate them to prepare to pressure each other if needed in the years beyond 2011.
Moscow’s strategy shift will also affect how Russia interacts with its former Soviet states. In 2010, Russia consolidated its control over Belarus, Ukraine, Kazakhstan and Kyrgyzstan, while strengthening its influence over Armenia and Tajikistan. Russia knows that it broadly dominates the countries and can now move more freely in and out of them — and allow the states more leeway, though within Russia’s constraints.
There are still three regions in which Russia has not solidified its influence and thus will be more assertive: Moldova, the independently minded Caucasus states of Georgia and Azerbaijan, and the Baltics. Of these, Russia is furthest along with Moldova, and changing relations with Georgia can largely be left for another day. Russia’s strategy toward the Baltics is changing, and Moscow is attempting to work its way into each of the Baltic states on multiple levels — politically, economically, financially and socially. Russia knows that it will not be able to pull these countries away from their alliances in NATO or the European Union, but it wants to have some influence over their foreign policy. Russia will be more successful in this new strategy in the Baltic state of Latvia and to a lesser degree in Estonia, while Lithuania will be more challenging.
Domestically, Russia is preparing for parliamentary elections at the end of 2011 and the highly anticipated presidential election in 2012. Traditionally, in the lead-up to an election, the Kremlin leader — currently Russian Prime Minister Vladimir Putin — shakes things up by replacing key powerful figures in the country. This time, Putin has asserted that his power over the Kremlin is strong enough that he will not need such a reshuffling, but many in the country’s elite will still scramble to secure their positions or attempt to gain better ones. Should President Dmitri Medvedev’s supporters move to break from Putin’s grip, it could trigger another clampdown on the country politically and socially, similar to the one seen in the mid-2000s. But whether Putin decides to run again as president or remain prime minister, his control over Russia remains secure…
The most important question for the Asia Pacific region is whether China’s economy will slow down abruptly in 2011. Though growth may slow, STRATFOR does not anticipate it to collapse beneath the government’s target level. This will require a tightrope walk between excessive inflation on one side and drastic [economic] slowing on the other. China’s leaders want a smooth transition to the next generation of leaders in 2012, and do not want the economy to collapse on their watch. They will err on the side of higher inflation, which could exacerbate social troubles, but Beijing is betting this will remain manageable.
China’s exports recovered in 2010 from the lows of 2009, but export growth is expected to slow in 2011. Wages, energy and utilities costs are rising; the government is letting the currency slowly appreciate; workers are demanding better conditions and more compensation while the demographic advantage and the amount of new migrant labor entering markets is slowing. All of these processes will continue in 2011 to the detriment of export sector stability. Already some manufacturers of cheap goods are operating at a loss. Reports of loss-making enterprises are not yet widespread, but they indicate the real strains from rising costs that will worsen in 2011. However, as long as the American recovery continues and there are no other big external shocks, the export sector will not collapse.
China’s primary hope for maintaining targeted growth rates is investment. Since 2008, Beijing has relied on government spending packages and, most important, gargantuan helpings of bank loans to drive growth. The central government will continue these stimulus policies in 2011. Meanwhile, Beijing will allow banks to continue high levels of lending, and the banks appear just capable of surging credit for another year. Deposits are still growing and outnumber loans, several major banks raised capital in 2010, and Beijing has toughened regulatory requirements to increase capital adequacy, reserves and bad loan provisions. Nevertheless the credit boom cannot last much longer, and the sector is sitting on a volcano of new non-performing loans worth at least $900 billion. Without credible reform in lending practices, continued high levels of lending in China will increase systemic financial risks as companies take out new loans to roll over bad debt and invest in inefficient or speculative projects, while adding to inflation and compounding the sector’s future burdens. Though a banking crisis may be averted in 2011, it cannot be averted for long.
With Beijing willing to use government investment and bank lending to avoid a deep slowdown, inflation will rise and cause economic and socio-political problems in 2011, generating outbursts of social discontent along the lines of previous inflationary periods, such as 2007-2008, or even, conceivably, 1989. Inflation is hitting all the essential commodities, and STRATFOR sources perceive unusually high levels of social frustration from Beijing to Hong Kong. The government will use social policies, price controls and subsidies to alleviate the problem, but will not be able to prevent major incidents of unrest. Security forces are capable of dealing with protests and riots, but such incidents will reveal the depth of the problems the country faces…
North Korea’s behavior in 2010 appeared off the charts — Pyongyang was accused of sinking a South Korean navy ship and killed South Korean civilians during the shelling of a South Korean-controlled island south of the Northern Limit Line, a maritime border the North refuses to formally recognize. In the past two decades, North Korea has demonstrated a clear pattern of escalating tensions with the South, with its neighbors and with the United States as a precursor to negotiations for economic benefits. These tensions centered on nuclear and missile developments, but not on outright aggression against the South — until 2010. Pyongyang appears to have made several very calculated decisions: First, that nuclear tests and missile launches no longer created the sense of uncertainty and crisis necessary to force the United States and South Korea into negotiations and concessions; second, that it had China’s cover; and third, that Seoul and Washington would not respond militarily to a more direct form of North Korean provocation. All indications suggest that Pyongyang bet correctly, and it is looking like 2011 will see a return to the more managed relations with North Korea seen a decade ago, barring a major domestic disagreement among the North Korean elite over Kim Jong Il’s succession plans…
Europe continues to deal with the economic and political ramifications of its economic problems. At the center is Germany, the most significant European power in 2011. Berlin will continue to press the rest of Europe to accept its point of view on fiscal matters, using the ongoing economic crisis as an opportunity to tighten the eurozone’s existing economic rules and to introduce new ones. Germany is pursuing three key initiatives: the development of a permanent bailout and sovereign debt restructuring mechanism (largely freeing Germany from having to bail out other eurozone members in the future); the acceptance of tougher monitoring, implementation and enforcement of eurozone fiscal rules; and continued adherence to German-designed austerity measures among eurozone members.
Berlin’s assertiveness will continue to breed resentment within other eurozone states. Those states will feel the pinch of austerity measures, but the segments of the population being affected the most across the board are the youth, foreigners and the construction sector. These are segments that, despite growing violence on the streets of Europe, have been and will continue to be ignored. Barring an unprecedented outbreak of violence, the lack of acceptable political — and economic — alternatives to the European Union and the shadow of economic crisis will keep Europe’s capitals from any fundamental break with Germany in 2011.
If anyone breaks the line on austerity, it will be the Irish and the Greeks. In Ireland, elections in the first quarter could bring anti-bailout or anti-austerity forces into power. Ireland has said “no” to Europe twice before on EU treaties, and it could be a wrench in Berlin’s plans again. In Greece, Athens is dealing with historically high unemployment… and another year of recession. Prime Minister George Papandreou is holding on to an ever-smaller majority in the parliament as his party’s lawmakers jump ship. However, Greece and Ireland are both already under EU bailout mechanisms. Other states may see changes in government (Spain, Portugal and Italy being prime candidates), but leadership change will not mean policy change. Germany would only be truly challenged if one of the large states — France, Spain or Italy — broke with it on austerity and new rules, and there is no indication that such a development will happen in 2011.
Ultimately, Germany will find resistance in Europe. This will first manifest in the loss of legitimacy for European political elites, both center-left and center-right. The year 2011 will bring greater electoral success to nontraditional and nationalist parties in both local and national elections, as well as an increase in protests and street violence among the most disaffected segment of society, the youth. Elites in power will seek to counter this trend by drawing attention away from economic issues and to issues such as crime, security from terrorism and anti-immigrant rhetoric and policy.
The country where elites are in most trouble is in fact Germany. Berlin has not yet made the case to its own population for Germany’s central role in Europe, and why Germany needs to bail out its neighbors when it has its own economic troubles. In large part this is because if Berlin were to make this case domestically, laying out the advantages Germany gains from the eurozone, it would further breed resentment abroad. With seven state elections in 2011 — four in a short period in February and March — the first evidence of nontraditional political forces’ coming to the forefront could be in Germany. This could accelerate if Berlin is also called upon to rescue one of the other troubled economies within this intense electoral period in the first quarter…
Economic decay, runaway corruption and political uncertainty will define Venezuela in the year ahead. Venezuelan President Hugo Chavez will resort to more creative and forceful means to expand his executive authority and muzzle dissent, but managing threats to his hold on power will become more difficult and more complex, especially considering Venezuela’s growing struggle to maintain steady oil production and the country’s prolonged electricity crisis.
The Venezuelan government will thus become increasingly reliant on its allies — namely China, Cuba and, to a lesser extent, Iran and Russia — to stave off a collapse. However, Chavez is facing the developing challenge of a potential clash of interests among those allies. China, Cuba and Russia, for example, will attempt to place limits on Venezuela’s relationship with Iran in the interest of managing their own affairs with the United States. Though doubts will rise over the sustainability of the Venezuelan government and economy, the Chavez government likely will not be toppled as long as oil prices allow Caracas to maintain a high rate of public spending.
Cuba, meanwhile, intends to lay off or reshuffle more than half a million state workers (10 percent of the island’s work force) by March 2011 while attempting to build up a fledgling private sector to absorb the labor. There are signs that Fidel and Raul Castro have reached a political consensus over the reforms and are serious about easing the heavy burden on the state out of sheer economic desperation. However, this will be a year of immense struggle for Cuba, especially as many of the new privately owned or cooperative businesses are expected to fail due to their lack of resources and experience and because of a shortage of foreign capital.
Cuba will continue to send positive, albeit measured, political signals in an attempt to make investment in the island more politically palatable to foreigners, but no drastic political reforms are expected. Cuba is headed for a major political change, but STRATFOR does not see that happening in 2011. Such a change will take time to develop and will entail a great deal of pain inflicted on the Cuban economy. We suspect that those eyeing a change in the Cuban leadership would rather the Castros take the fall for the economic hardships to be endured during this slow process…
In Mexico, the next year will be critical for the ruling National Action Party (PAN) and its prospects for the 2012 elections. Logic dictates that for the PAN to have a reasonable chance at staving off an Institutional Revolutionary Party (PRI) comeback, the level of cartel violence must come down to politically acceptable levels. Though serious attempts will be made, STRATFOR does not see Mexican President Felipe Calderon and the PAN making meaningful progress toward this end. If there is a measurable reduction in overall cartel violence, it will be the result of inter-cartel rivalries playing out between the two current dominant cartels — the Sinaloa Federation and Los Zetas — and their regional rivals, mostly independently from the Mexican government’s operations.
Mexican authorities will devote considerable resources to the Tamaulipas and Nuevo Leon regions, and these operations are more likely to escalate tensions between the Gulf cartel and Los Zetas than to reduce violence in these areas. Political stagnation will meanwhile become more severe as Mexico’s election draws closer, with parties forming alliances and the PRI taking more interest in making the PAN look as ineffectual as possible on most issues. END QUOTE
Thanks again to Stratfor for allowing me to bring you this timely information. You may also want to check out Dr. George Friedman’s latest book: The Next Decade – Where We’ve Been and Where We’re Going, which will be available on January 25. You can order it at http://www.stratfor.com/nextdecade.
Hoping your New Year is off to a great start,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.