bizzXceleration: Performance, Value and Profit

Geo-politics

Joint Operating Environment 2008 The processes propelling globalization over the next two decades could improve the lives of most of the world’s population, particularly for hundreds of millions of the poorest. Serious violence, resulting from economic trends, has almost invariably arisen where economic and political systems have failed to meet rising expectations. A failure of globalization would equate to a failure to meet those rising expectations. Thus, the real danger in a globalized world, where even the poorest have access to pictures and media portrayals of the developed world, lies in a reversal or halt to global prosperity. Such a possibility would lead individuals and nations to scramble for a greater share of shrinking wealth and resources, as occurred in the 1930s with the rise of Nazi Germany in Europe and Japan’s “co-prosperity sphere” in Asia.

Global Trends 2025: A Transformed World The international system—as constructed following the Second World War—will be almost unrecognizable by 2025 owing to the rise of emerging powers, a globalizing economy, an historic transfer of relative wealth and economic power from West to East, and the growing influence of nonstate actors. By 2025, the international system will be a global multipolar one with gaps in national power2 continuing to narrow between developed and developing countries. Concurrent with the shift in power among nation-states, the relative power of various nonstate actors—including businesses, tribes, religious organizations, and criminal networks—is increasing. The players are changing, but so too are the scope and breadth of transnational issuesimportant for continued global prosperity. Aging populations in the developed world; growing energy, food, and water constraints; and worries about climate change will limit and diminish what will still be an historically unprecedented age of prosperity. Historically, emerging multipolar systems have been more unstable than bipolar or unipolar ones. Despite the recent financial volatility—which could end up accelerating many ongoing trends—we do not believe that we are headed toward a complete breakdown of the internationalsystem, as occurred in 1914-1918 when an earlier phase of globalization came to a halt. However, the next 20 years of transition to a new system are fraught with risks. Strategic rivalries are most likely to revolve around trade, investments, and technological innovation and acquisition, but we cannot rule out a 19th century-like scenario of arms races, territorial expansion, and military rivalries. This is a story with no clear outcome, as illustrated by a series of vignettes we use to map out divergent futures. Although the United States is likely to remain the single most powerful actor, the United States’ relative strength—even in the military realm—will decline and US leverage will become more constrained. At the same time, the extent to which other actors—both state and nonstate—will be willing or able to shoulder increased burdens is unclear. Policymakers and publics will have to cope with a growing demand for multilateral cooperation when the international system will be stressed by the incomplete transition from the old to a still-forming new order.

World Outlook

Latest Roubini Article for Foreign Policy: "Warning: More Doom Ahead" Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst. The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short. Severe vulnerabilities remain in financial markets: a credit crunch that will get worse before it gets any better; deleveraging that continues as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus leading to cascading falls in asset prices, margin calls, and further deleveraging; other financial institutions going bust; a few emerging-market economies entering a full-blown financial crisis, and some at risk of defaulting on their sovereign debt. Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months. It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s. As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain. What constitutes a “recession” will depend on the country in question. For China, a hard landing would mean annual growth falls from 12 to 6 percent. China must grow by 10 percent or more each year to bring 12 to 15 million poor rural farmers into the modern world. For other emerging markets, such as Brazil or South Korea, growth below 3 percent would represent a hard landing. The most vulnerable countries, such as Ecuador, Hungary, Latvia, Pakistan, or Ukraine may experience an outright financial crisis and will require massive external financing to avoid a meltdown. For the wealthiest countries, a debilitating combination of economic stagnation and deflation might happen as markets for goods go slack because aggregate demand falls.

IMF's Loans Surge to $41.8 Billion in November, `Busiest' Month in History The International Monetary Fund this month lent more money to cash-strapped governments than it has in the past five years combined. The IMF agreed this month to $41.8 billion in loans, approving $16.4 billion for Ukraine, $15.7 billion for Hungary, $2.1 billion for Iceland and $7.6 billion for Pakistan. Financing is in the works for Serbia, Turkey, Belarus and Latvia, turning eastern Europe into a regional ward of the IMF the way Southeast Asia was a decade ago. Facing a decline in relevance and revenue just a year ago, the IMF under Managing Director Dominique Strauss-Kahn is getting a lift from the global credit crisis. Demand for its loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence in the developing world. “This has arguably been the busiest month in the IMF’s 62- year history,” said Simon Johnson, former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics, in Washington. “It seems incredible that just six months ago the main shareholders of the fund -- the G-7 nations -- said the IMF was out of the lending business.” IMF disbursements peaked at $26.6 billion in 2002, according to the fund’s records that date back to 1984. The Washington-based international lender was formed by world economic powers in the mid-1940s to create a pool of money for countries in crisis.

Food Prices Will Rise Next Year, Causing Export Bans, Riots: Chart of Day Food prices will rise next year, prompting a revival of protectionism from food-growing nations and risking a renewed bout of rioting, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich. “Agricultural commodities will outperform the broad commodity indices in 2009,” Hitzfeld wrote in a research note this week. “If key crop-producing countries then impose export bans again and speculators drive up prices via physical stockpiling and futures contracts, new food unrest is even conceivable in the second half of 2009.” The CHART OF THE DAY shows food prices for the past 10 years as measured by an index compiled by UBS AG and Bloomberg that tracks at least 13 foodstuffs, including wheat, soybeans, sugar, cocoa and coffee. The index has declined 35 percent since peaking in July.

World Economic Outlook Report,World Economic Outlook—Update, World Economic Outlook Database (see also the Data Mapper tool)

Countries/Regions

Brazil Caught by Credit Squeeze Forcing Farmers to Cut Coffee, Corn Yields The collapse of global credit markets that is pushing the U.S., Europe and Japan into simultaneous recessions for the first time since World War II also threatens farmers in Brazil, the world’s biggest grower of coffee, oranges and sugar cane, the second-largest producer of soybeans and third-biggest of corn. Smaller harvests in Brazil may increase costs of commodities next year, said Andre Pessoa, an analyst at Agroconsult who conducts the country’s broadest crop survey. “When we look ahead, we see demand continuing to grow, while supply will face difficulties,” Pessoa said in an interview from the Florianopolis, Brazil-based company. Futures contracts in Chicago show corn will jump 18 percent by the end of 2009 to $4.175 a bushel and soybeans will gain 2.2 percent to $9.02 a bushel. Coffee will rise 10 percent to $1.258 a pound, according to contracts in New York. Reduced fertilizer use will lower Brazil’s soybean output as much as 2.7 percent, while corn may decline 7.3 percent, the government said Nov. 6. Brazil’s coffee harvest may drop 26 percent next year, said Lucio Araujo, the commercial director at Cooxupe, a cooperative representing 11,000 growers in the Guaxupe region. Brazilian growers were short of at least 15 billion reais needed to invest in crops, Agriculture Minister Reinhold Stephanes said Oct. 9. Banks and financial companies worldwide, suffering from $969.5 billion of losses and writedowns since the start of 2007, are restricting credit as they struggle to replenish reserves, according to data compiled by Bloomberg. The growth of Brazil’s economy, Latin America’s biggest, may be cut in half next year after credit dried up and slumping commodity prices pared export revenue, Central Bank President Henrique de Campos Meirelles said Nov. 21. He didn’t provide a specific forecast. The expansion will slow to 4.9 percent this year and 3.6 percent next year, from 5.4 percent in 2007, according to a Bloomberg survey of 12 economists.

China Is `Heart of Global Slowdown' as Property Slump Stalls Driver of GDP House prices in Shanghai, Shenzhen and Guangzhou are plunging, and the global economy may grind almost to a halt next year because of it. Construction of homes, offices and factories fell at least 16.6 percent in October after rising 32.5 percent a year earlier, according to Macquarie Securities Ltd. That's squeezing an economy already slowed by recessions in the U.S., Japan and Europe that have cut demand for exports. Building is the biggest driver of China's expansion, contributing a quarter of fixed- asset investment and employing 77 million people. The central bank cut its key interest rate by the most in 11 years last week and the government said “forceful” measures were needed to arrest a faster-than-expected economic decline. Without more rate cuts and government spending, China is unlikely to contribute the 60 percent of global growth Merrill Lynch & Co. forecasts for next year, further slowing the world economy. “China is now at the heart of the global slowdown,” said Jim Walker, chief economist at Asianomics Ltd., an economic advisory firm in Hong Kong. “It means that global growth is probably going to be dragged down close to zero next year.” Walker, voted best regional economist in an Asiamoney magazine brokers' poll for 11 years through 2004 when he worked for CLSA Asia Pacific Markets, estimates China will grow zero to 4 percent next year, with a 30 percent chance of a contraction.

• Unexpected Drop in China’s Imports and Exports

Japan fell into deeper recession in third quarter Japan fell into a deeper recession in the third quarter than first thought, the government said Tuesday, as exports weakened, domestic demand fell and companies bracing for a prolonged downturn pared inventories.The Cabinet Office said that Japan's economy shrank at an annual pace of 1.8 percent in the July-September period, compared with its original estimate of a 0.4 percent contraction. The figure was much worse than market expectations for a 0.9 percent decline in gross domestic product, underscoring the severity of the slump that the world's second largest economy is mired in. The data also confirms that Japan slipped into recession in the third quarter after GDP contracted an annualized 3.7 percent in the April-June period. A recession is commonly defined as two consecutive quarters of negative growth, though many economists using other parameters say that the current downturn actually began in late 2007.

Russia Wrestles With Ruble Collapse It is amazing how things change in a few months. In September, Russia was on top of the world, the returning global power. Today, it is slipping into obscurity. If it did not have nuclear weapons, most would not even care what happens. Russian economic growth in this decade was completely driven by rising commodity prices, mainly of oil and gas. As the global economy goes into recession and commodity prices either decline or remain at today's levels, Russia will relive the horrible 1990s when it defaulted on its debt and suffered from a severe inflation. Think of Russia as a very large oil and gas producing company that is run for the most part by a government that makes General Motors' (nyse: GM - news - people ) and Ford's (nyse: F - news - people ) management and autoworkers' unions look like progressive thinkers. Over the last five years, Russia de-privatized (a clever euphemism for "stole") oil assets from private investors and has been milking petro cash flows from now state-owned oil companies. The government is simply not equipped to manage projects that have a multidecade life. Russia underinvested in exploration and development of oil and gas in the last decade and that is why its oil and gas production is declining. Communism failed for a reason: Government is a horrible capital allocator. The time horizon and time in office of a government bureaucrat is much shorter than the horizon of an oil company, therefore when choosing between drilling holes in the middle of nowhere that will increase oil production years down the road or raising benefits to retirees, retirees win. But it gets worse. As oil prices rose, the Russian government decided that it did not need the West anymore. It felt that the contracts it signed with BP (nyse: BP - news - people ) and Royal Dutch Shell (nyse: RDSA - news - people ) in the 1990s--when oil prices were much, much lower and no one wanted to invest in Russia--were not advantageous anymore. Using deceptive legal practices, it unilaterally renegotiated those contracts muscling away lucrative projects from these companies.

Credit Is Issue for Gas Field The global credit crisis could delay the launch of Russia's giant Shtokman natural-gas field, according to the chief of the project's operator. Russian gas monopoly OAO Gazprom owns 51% of Shtokman Development, a joint venture with France's Total SA and Norway's StatoilHydro, which own 25% and 24%, respectively. Located in icy waters more than a thousand feet beneath the Barents Sea, Shtokman is estimated to hold 3.8 trillion cubic meters of gas, or enough to meet U.S. demand for six years. Early estimates of costs to develop the field top $20 billion, and the consortium expects as much as 70% of the development cost for the project's first phase to be raised from capital markets. "We hope that the financial crisis will be over by the time we enter the market," said Mr. Komarov, who was appointed to his post by Gazprom. The massive Arctic project will remain economically viable if oil prices stay around $50 or $60 a barrel, he added. The consortium hopes to raise the first funds next year, when it plans to approve a final investment plan for the project's first phase. Total and StatoilHydro declined to comment. Production at the field, which was discovered in 1988, has already been delayed several times. At its last estimate, Gazprom expected gas output to start in 2013, with production of liquified natural gas to begin a year later.But in July, Benedikt Henriksen, chief of StatoilHydro's industrial relations in Russia, said timely development of the field would depend on the choice of subcontractors, expressing doubt that Shtokman would start in 2013. While agreeing that the credit crunch may slow Shtokman's timetable, some analysts suggest the project's original plans were unrealistic. Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies, said he "was always skeptical that Shtokman will be delivered on time, given the incredible difficulty of the project." Mr. Stern said he had expected the project to be completed toward 2020, or at least not before 2017. Western energy giants including ConocoPhillips and Chevron Corp. had hoped to participate in the development of Shtokman before Russia surprised everyone in 2006 by saying it would develop the field on its own. But last year, after years of negotiations, Gazprom chose Total and StatoilHydro to help. However, terms of the alliance were unusual for the oil industry and unfavorable for Gazprom's junior partners. To date, neither has been able to book reserves from Shtokman, which, for the time being, belongs entirely to Gazprom. The consortium plans to produce 23.7 billion cubic meters of natural gas a year in the first phase of development.

• Gazprom, Once Mighty, Is Reeling, Europe begins to feel gas pipeline pinch

Why Russia's woes should worry you As financial markets and governments worldwide hope for a brighter year, one big country's troubles threaten to send the global economy tumbling into a deeper hole. Is there some wild card out there that could make the global economic mess even worse? For months now, my attention has focused on Russia. The country is big enough, and its problems serious enough, that it could take the global crisis to a new level of danger. The good news is that Russia is in much better shape than it was the last time it shuddered into crisis, in 1998. The bad news is that Russia's current problems bear an eerie resemblance to those that took the country into default, led to the fall of a once-popular political leader and forced the U.S. Federal Reserve to organize a bailout in order to prevent a panic in the global financial markets. Let me quickly summarize the last crisis: (…)Ending Russia's crisis doesn't require a 180-degree turn in the economy, the Russian stock market or the ruble. What's important is the pace of the fall. If the ruble declines in a slow and measured fashion, if the economy looks like it's headed for a recession instead of a deep plunge into panic, and if stocks fall slowly enough that the stock market can stay open, the crisis will be manageable. And Russia will remain one of a very large group of countries coping with a global economic and financial crisis rather than becoming a wild card with problems big enough to threaten the global economy. Because the speed of the decline is critical, the first quarter of 2009 poses the greatest risk. If the crisis in Russian financial markets, Russian banks and the ruble turns into a rout in the first quarter, then Russia's problems are on the way to becoming the world's problems. Watch the ruble: Some currency experts think there's a chance it could fall 20% to 30% in the first quarter of this year. That would constitute a rout.

‘McBritain’ Almost Twice as Risky as McDonald's: Chart of Day Investing in U.K. government debt is almost twice as risky as buying bonds sold by McDonald’s Corp., based on prices in the credit-default swap market. The CHART OF THE DAY compares the cost of protecting against a decline in the creditworthiness of the two borrowers. U.K. protection became more expensive on Sept. 29, when the pound suffered its biggest one-day loss against the dollar in 16 years after the government took control of Bradford & Bingley Plc, Britain’s biggest lender to landlords. Britain risks being viewed pejoratively as a banana republic “apart from the technical disqualification that we have a monarch and so cannot be a Republic, and it’s too cold to grow bananas anyway,” says Sean Corrigan, who helps oversee about $8.5 billion as chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland. McDonald’s, the world’s largest restaurant company, said yesterday that global sales rose 7.7 percent in November. The marketing icon for the Oak Brook, Illinois-based company famed for its burgers is a clown figure called Ronald McDonald. “Talk about ‘McBritain’ is an insult to Ronald’s outfit,” Corrigan said.  Separated At Birth?

Hedge Fund Britain Sterling -- never far from the heart of U.K. political debate -- is back on the agenda with a vengeance. The U.K. currency now stands at an all-time low against the euro, with one euro worth 87.79p compared to 71.91p a year ago, and against the dollar has fallen to $1.47 from $2 a year ago. How much lower can it go? That depends on what is driving the declines. Already, the pound has fallen further than can be explained by economic conditions. Sterling's 25% drop in 18 months on a trade-weighted basis is its biggest depreciation since the 1970s and leaves the pound trading at a 5% to 15% discount to fair value based on purchasing power parity. But the alternative explanation -- that sterling is a victim of "Hedge Fund Britain," with London cast as "Reykjavik-on-Thames" -- doesn't really work either. According to this theory, the pound is falling because investors are spooked by the scale of the U.K.'s gross foreign liabilities, now approaching 500% of gross domestic product thanks to a combination of government borrowing plus the debts of the banking industry. As with any highly leveraged entity, it is said, the U.K. presents a substantial refinancing risk. But the evidence for this is patchy. So far, there has been no sharp rise in gilt yields that would suggest a government funding problem. While the banking sector's foreign liabilities are large at around three times GDP, they are still well below Iceland's seven times -- and would be lower still if one strips out the debts of foreign banks based in the U.K. that are no responsibility of the U.K. government. What's more, the bulk of these overseas liabilities are matched by assets that can be readily financed under existing central bank liquidity schemes. In fact, it is the asset side of the U.K. balance sheet that provides the better explanation for sterling's weakness. That's because the U.K.'s overseas assets are skewed toward riskier assets, such as equities and bonds. The collapse in world markets over the past 18 months has reduced the value of these assets, turning the U.K.'s net asset position negative.

The Irish Economy’s Rise Was Steep, and the Fall Was Fast Everything, it seems, has grown worse here. The recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50 percent. Bank shares have plummeted by more than 90 percent. Unemployment is approaching 10 percent. The roots of Ireland’s fall date to more than 20 years ago, when a clutch of economists, politicians and civil servants put their heads together in this very pub and planted the philosophical seeds for the Irish economic miracle. Known widely as the “Doheny & Nesbitt School of Economics,” these beery musings soon became government policy that chopped taxes in half, sharply reduced import duties and embraced foreign investment — a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe. But beyond the glow of this sudden efflorescence that made Ireland the fourth most-affluent country in the Organization for Economic Cooperation and Development, a housing bubble had begun to form. Low interest rates, a wave of inward immigration and a bank lending spree drove housing’s share of the economy to 14 percent, the highest in Europe, from 5 percent, according to research done by Finfacts, a financial Web site that analyzes the Irish economy. Ireland’s policy makers, like their counterparts in the United States and Britain, were seduced by record tax inflows and a full-employment economy. They paid little heed to the lonely voices that warned of the crash that finally came over the summer, when interest rates in Europe began to rise. Banks that had steered more than 60 percent of their loans toward property stopped lending, and asset values plummeted. Ireland’s Slowing Economy

World Bank Cuts Forecast for East Asia '09 Growth The World Bank slashed its forecast for economic growth in East Asia next year given the waning demand in major economies for the region's goods. In its half-yearly East Asia and the Pacific assessment -- excluding Japan, Australia and New Zealand -- the World Bank said the region is likely to grow 5.3% next year and 6.5% in 2010. That would follow estimated growth of 7% this year. "Challenges facing the East Asian economies have multiplied during the course of 2008, spelling hard times in 2009," the Washington-based organization said, noting the drop-off in import demand in the world's major economies and a big decline in commodities prices. In April, it had forecast regional growth of 7.4% next year. The World Bank noted that many countries have cut interest rates and introduced fiscal packages to support their economies. It warned, though, that fiscal stimulus packages need to be timely and delivered through appropriate vehicles to be effective in boosting growth. Governments need to also be aware that companies and commercial banks will remain under financial stress that will probably worsen as economic activity slows, defaults accelerate and balance sheets deteriorate. Given that, short-term measures to boost liquidity and ward off pressure on balance sheets will need to be complemented by medium-term efforts to improve banking and financial supervision, the report said.China will continue to play a key role in shaping the region's growth profile in the medium term and the country's buffers against the financial crisis -- including hefty international reserves, and fiscal and current-account surpluses -- are "impressive," it said in a separate report on the global economy. China's economic growth is expected to fall to 7.5% next year from 9.4% this year but bounce back to 8.5% in 2010. The World Bank expects India, the region's other main growth engine, to expand 5.8% next year and 7.7% in 2010.The multinational body warned there are risks to its current outlook for the region. The main one is that an extended recession or sluggish growth in the major global economies could slow demand for Asia's goods. The World Bank now expects Japan's economy to contract by 0.1% next year, followed by growth of 1.5% in 2010; the U.S. economy is likely to shrink 0.5% next year and grow 2% in the subsequent 12 months.

As U.S. Buys Less From China, Germany Suffers The United States, with its credit-driven economy, has long ensured that others, notably China, Germany and Japan, have been able to pile up trade surpluses. That dynamic has shifted, with Americans paring purchases at a ferocious rate. “As the American consumer now capitulates, the export bubble is the next to go,” the chairman of Morgan Stanley in Asia, Stephen Roach, said. “Export-led economies around the world are in for a very tough rebalancing.” In Germany, the world’s largest merchandise exporter since 2003, sales to other countries drove growth for the last five years. But in the third quarter, the slump in exports helped push Germany into recession. Virtually all economists expect 2009 to be a lost year for Germany, which will pay a heavy price for the downturn. The retrenchment bears out what Mr. Haeusgen is seeing, that there is a strong correlation between the Chinese prosperity that rested in part on American profligacy, and German sales to China and elsewhere. Germany’s industrial exports feed a Chinese economy that itself is fed by American demand for goods. Jacques Cailloux, chief Europe economist at Royal Bank of Scotland in London, has established a strong correlation between Chinese exports to the United States and German exports to China. The American trade deficit in 2007 was $708.5 billion; Germany’s $288.5 billion surplus and China’s $262.2 billion excess represent much of the other side of that equation.