Up against a gathering credit crunch, the Chinese economy will slow to almost stall-speed; the price of Brent crude will sink below $80 a barrel; Germany will slide back into recession; the United Kingdom will remain intact and the internet will begin to Balkanise, leading to a boom in encryption technology but problems for the big global online brands.
’Tis the season for self-indulgent – and mainly futile – crystal ball gazing. What does the future hold for the economy and markets? Normal health and wealth warnings apply.
My big prediction is for $80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.
But first, there’s the frequently humiliating task of revisiting last year’s predictions.
A year ago, I did a cowardly thing; I hedged my bets, or rather, I wasn’t specific enough to easily pin down. This at least has the merit of enabling me to claim I was more right than wrong, though without any great sense of pride, since I basically hugged the consensus.
After a poor start to the year, I predicted some sort of a recovery for the UK but recession in the eurozone (tick). The US economy would be held back by budget stalemate and the sequester, I said, requiring further monetary support (tick), while the bull market in government bonds would come to an end – though not a grisly one, with long bond yields rising a bit but nowhere near back to pre-crisis levels (tick).
However, this was where my powers of prediction deserted me, for I also said that China and south-east Asia would surprise on the upside. They did not. Lower than expected growth in emerging markets is one of the major causes for disappointment in the world economy as a whole. I’m struggling to see why things are going to get significantly better.
As we enter the new year, China fights a nascent credit crunch at the heart of its financial system. Will the emergency liquidity provided be enough? Admittedly, there is no possibility of China succumbing to a Lehman-style collapse, the event that turbo-charged the financial crisis in the West. There will be no comparable heart attack. Banks in China are state controlled and won’t be allowed to fail.
But, with a growing crackdown on the shadow banking sector, which is where much of the credit growth of recent years has been coming from, it’s hard to avoid the conclusion that a major slowdown is coming.
China is about to learn the hard way that there is a downside to the free market – by definition, it cannot be dictated to. In any case, China is long overdue a pronounced, cyclical downturn. This will take much of the demand pressure off commodity prices.
Abatement in demand comes at a time of possibly significant improvements in supply, with the US increasingly self-sufficient in hydrocarbons and the promise of increased production from Iraq. Continued progress in bringing Iran in from the cold could add a further 1m barrels a day to world supply.
There are lots of ifs and buts about this prediction. As one new area of supply gets switched on, others tend to get switched off. Saudi Arabia is running at full tilt at the moment and, therefore, has plenty of scope to cut production to absorb new, alternative sources. All the same, the case for lower commodity prices seems strong.
On almost every level, America is favoured by the current energy revolution; significantly lower prices for consumers, a big cost advantage to energy-intensive industries, disengagement from the Middle East and so on.
Expect the US to build on these advantages over the year ahead when, in any case, the removal of last year’s budgetary stalemate ought to lead to higher growth. Markets seem to have put last summer’s taper tantrum behind them.
Regrettably, the same cannot be said about the eurozone, where the crisis will re-erupt in political form. Policy makers have succeeded in keeping the eurozone together but at terrible economic cost. In times gone by, such brutalisation would already have sparked revolutions. These days those that would lead such change – the young – simply emigrate.
Nonetheless, voters will vent their anger in May’s European elections, leading to a profoundly eurosceptic parliament. With dysfunctional populists to deal with, eurocrats will just carry on regardless but attitudes will harden and the eurozone will become progressively ungovernable.
With China slowing, there must be some possibility that eurozone travails will finally begin to bite at the core, by pushing Germany into recession. Perhaps this will provide the necessary wake-up call. Unwise to bet on it, though.
In Britain, households are feeling more confident but no one would think the recovery as it stands a sustainable one. For that to happen, there needs to be a return to real wage growth and to decent levels of business investment.
Absent of complete meltdown in Europe and China, these missing ingredients will begin to manifest themselves towards the year’s end. Removal of the uncertainty over the future of the union will provide a further boost to confidence.
For business and investment opportunities, look to China, despite my predicted slowdown, in anything to do with clean air and water, to south-east Asia for defence spending and possibly for encryption technologies that break US dominance of the internet.
Ever more alarming revelations about the extent of National Security Agency intrusion into the affairs of foreign jurisdictions are fuelling calls in Europe and beyond for fortress-like protections.
This in time will severely obstruct the global nature of the internet, fragmenting it into heavily protected “walled gardens”, with separate systems, similar to China. Google, Facebook, et al, beware. Some of the flightier tech valuations will take a pounding.
In Thomas Mann’s metaphysical novel The Magic Mountain, the chief protagonist, Hans Castorp, eventually descends from a life of quiet contemplation and philosophical discussion high up in the Swiss Alpine resort of Davos to the brutal reality and mass slaughter of the First World War.
With the centenary year of this catastrophe now upon us, it’s worth remembering just how close to fracture the world always is and just how hard these destructive forces must continually be fought.
But a happy and prosperous new year in any case.