Barack Obama wanted a regulatory reform bill on his desk by the end of last year. It did not happen.
Rather than wait impatiently on the sidelines, the president on Thursday came up with new restrictions on Wall Street. which will further delay a bill – and add to the lobbying frenzy that surrounds it.
In a surprise move, Mr Obama adopted the ideas of Paul Volcker, the former Fed chairman, including a prohibition on commercial banks trading purely for their own account and a ban on owning hedge funds and private equity firms.
Tim Geithner, Treasury secretary, who is facing increased hostility from Democrats for not adopting punitive measures against Wall Street, had not taken up Mr Volcker’s proposals but did not fight the president’s decision.
Officials said banks would have to choose between owning an insured depository on one hand and owning proprietary trading operations or stakes in hedge funds and private equity firms on the other. They would, however, be able to continue proprietary trading related to their customers’ businesses.
Amid continuing uncertainty over the detail of the reforms, bank executives said they believed they could continue to own hedge funds as long as they did not invest their own funds.
Congress members on both sides of the aisle declined to commit to the Obama plan in interviews with the Financial Times. But Judd Gregg, a Republican member of the Senate banking committee, and Jack Reed, a Democratic counterpart, both said they had been attracted to Mr Volcker’s ideas during private meetings and were interested in considering them.
“This problem has not just been too big to fail, it’s been too big to manage,” said Mr Reed. “A lot of these organisations – they have the core of a bank but that is overwhelmed by very sophisticated subsidiaries and trading programmes.”
Mr Gregg said he was “willing to listen”. “I’m a little concerned that this, however, is less about financial reform and more about the politics of the day and an attempt to get a populist message going and use the banks as a whipping boy, which I don’t think is constructive.”
Rob Nichols, president of the Financial Services Forum, which represents leading institutions in Washington, said: “Trading, proprietary or otherwise, did not lead to the financial crisis.”
Although aides sought to distance the proposals from the Democratic defeat in Massachusetts, Mr Obama was spoiling for a fight on Thursday as he announced his second crackdown on Wall Street in two weeks following last week’s $90bn levy.
“I welcome constructive input from folks in the financial sector. But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common sense rules of the road that would protect our economy and the American people,” he said.
Mr Volcker has intellectual clout and political capital in Congress, which will be needed as the administration tries to gather support for its new proposals. Ironically, it was the Treasury and the White House – where Mr Volcker heads an economic advisory board – that had given his ideas the cold shoulder.
One man who had supported Mr Volcker and pushed a version of his plan through the House is Paul Kanjorski, a Democratic member of the House financial services committee, who passed an amendment allowing regulators to force a sale of a risky division.
Thursday’s move by Mr Obama removes the regulators’ leeway and Mr Kanjorski celebrated the toughened approach to what he called the “super core” of the industry’s problems.
But officials struggled to explain the link between this plan and the financial crisis. Senior Treasury officials have long argued that the crisis had very little to do with own-account gambling by banks with insured deposits. Many of the institutions that got into trouble were not traditional commercial banks.
Sceptics, including within the administration, said it would prove hard to put an end to the kind of own-account activities Mr Obama wants to stop without also impeding client-based in-vestment banking he wants them to continue.
Moreover, there is apparently nothing in the proposal to stop former investment banks such as Goldman Sachs and Morgan Stanley simply giving up their newly acquired banking charters and reverting to being non-banks.
In reforms that could force the restructuring of some of the biggest names in US finance, including JPMorgan Chase and Goldman Sachs, Mr Obama promised that “never again will the American taxpayer be held hostage by a bank that is too big to fail”.
Flanked by Paul Volcker, the former Federal Reserve chairman, who has advocated the move for months, Mr Obama called for banks to be banned from running their own trading desks and “owning, investing in or sponsoring” hedge funds and private equity groups.
Tim Geithner, the Treasury secretary, who has come under attack from Democrats on Capitol Hill, backed the plan, officials said, even though his own regulatory proposals have stopped well short of the sweeping Volcker reforms.
Republicans responded coolly, but did not reject the proposals out of hand. Richard Shelby, senior Republican on the Senate banking committee, called for more details and new hearings.
Others accused the White House of adopting a populist message to divert attention away from the blow delivered by the Democrats’ defeat in the Senate race in Massachusetts.
The measures, which require congressional approval, hark back to the response to the 1929 stock market crash that ushered in the Glass-Steagall Act, separating commercial and investment banking, which remained in law until 1999.
Mr Obama called for new rules – beyond current regulations restricting banks from holding no more than 10 per cent of US deposits – that would place unspecified size limits on institutions.
“In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward,” said Mr Obama. “And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.”
Congressional aides and administration officials said a lot of detail remained to be decided. Barney Frank, chairman of the House financial services committee, said he would support new rules if they allowed banks to dispose of newly banned operations over three to five years and thereby prevent a “fire sale”.
Bankers said the lack of detail and the likelihood of a protracted debate in Congress would give them the chance both to lobby for changes and to adapt their businesses, with, for example, Goldman possibly giving up the financial holding company status it adopted in the financial crisis.
Jonathan Garner is a Managing Director and Chief Asian and Emerging Market Strategist at Morgan Stanley
Emerging market equities returned 75 per cent in dollars in 2009, outperforming developed market equities by around 50 per cent. Over the past decade they have returned more than 100 per cent in dollars with dividends reinvested, versus negative returns for developed market equities.
At Morgan Stanley, we estimate that emerging market economies will grow their gross domestic product by 6.5 per cent in 2010 against just 2 per cent for the advanced economies. But that is not the reason why we expect further outperformance of emerging equity markets.
In a recent Insight column in the Financial Times (“Busting the myth of Brics”), Peter Tasker argued that strong GDP growth in emerging markets was not a reason to invest in their stock markets. He cited academic work showing the lack of positive correlation between GDP growth and stock market returns. Long term bulls of emerging stock markets are also aware of this work. Rather, we have focused on the ability of companies in emerging markets to outperform their developed peers, selling both globally and into local markets.
Currently, the trailing return on equity (ROE) for the MSCI EM benchmark is 12 per cent versus 7 per cent for the developed markets MSCI World benchmark. On our estimates, 2010 is likely to be the 10th year in a row when the ROE of emerging market companies is superior to developed market firms. In fact, ROE in emerging markets has already troughed well above the prior cycle low, while developed markets may now be troughing at a level which is well below. For this track record one is asked to pay a 2.1 times price to book multiple and a trailing price/earnings (p/e) multiple of 18 times which is a 35 per cent discount to developed markets. The forward p/e multiple on consensus earnings is 14 times. These valuations are hardly in bubble territory and well below prior peaks in 2007, 1999 and 1993.
Our analysis of data for 650 non-financial companies in emerging markets shows that the main driver of superior return on equity is operating efficiency. Corporate leverage has remained low after the deleveraging of the 1997/98 cycle. This is important because, in true bubbles, like Japan in the late 1980s, not only were equity valuations far higher than in EM today, but higher levels of corporate leverage flattered ROE in the upswing. They also reinforced the economic and stock market downswing once the bubble burst.
A further resort of the bears is the argument that the economic growth of China, the largest index constituent in MSCI EM, is characterised by over-investment and under-consumption. Official data indicates that Chinese households consumed just 36 per cent of GDP in 2008, whilst gross fixed capital formation amounted to 47 per cent of GDP. Our analysis suggests that Chinese household consumption spending, properly counted, is probably much larger both in absolute terms and as a share of GDP (perhaps $2,800bn or 50 per cent of 2008 GDP).
A key area of understatement of both consumption and GDP is in relation to the income generation of those working in the services sector, especially in small companies. Its counterpart is under-estimation of services spending by households. China’s official statistics currently suggest that while the dollar value of Chinese household consumption of tradeable goods amounts to 38 per cent of the US total, consumption of services amounts to just 6 per cent of the US total.
The ratio of consumption of housing services is lower still at just 3 per cent of the US total. Hence, in per capita terms, the data indicates that the average Chinese person consumes $38 per annum of housing services versus over $5,000 per capita in the US ($500 per capita in Brazil). It is most unlikely that this reflects reality on the ground, in particular, given the transition to private rental markets and owner occupancy since the late 1990s housing reforms. China’s statisticians also continue to struggle to account for the burgeoning development of consumer services in areas such as financial services and insurance, communications, private medical provision and recreation.
Consumption clearly played a key role in China’s rapid exit from recession in 2009. China ended 2009 as the world’s largest market (in unit terms) in cars and mobile phone handsets and seems likely to overtake the US as the largest flat screen television market in 2010. There was also a far more rapid take up of property market inventory than most analysts expected, given the ratio of prices to official household income data.
There is every reason to believe the secular bull market in emerging market equities is more robust than the sceptics suggest. The burden of proof is on developed market companies to deliver the structural improvement in return on equity achieved by their EM peers after the crisis of 1997/98.
By Patti Waldmeir in Shanghai and Simeon Kerr in Dubai
Published: January 18 2010 07:09 | Last updated: January 18 2010 07:09
Chinese investors, who have trawled the world for distressed car brands and cheap commodity assets since the beginning of the global financial crisis, will now take a shopping trip to Dubai to look for property bargains.
A trip to the UK in the second half of the year may also be on the cards for the merchants of Wenzhou, famed as a city of millionaire entrepreneurs.
Zhou Dewen, head of the Wenzhou SME (small and medium-sized enterprises) Business Development and Promotion Association, says more than 20 Wenzhou companies, from real estate groups to investment firms and manufacturing companies, will visit Dubai towards the end of next month.
They have been attracted to the city-state by reports that property prices there have fallen further since the local debt crisis erupted in November, and signs that Dubai’s economy may have bottomed out and begun to recover.
Investors have been circling Dubai for months seeking distressed property sales – with some small deals completed. Real estate agents say property values are stabilising after falling as much as 50 per cent from their 2008 peaks.
But brokers in the emirate say many owners, including government-owned companies, have been reluctant to reduce prices in spite of mounting debt woes, a lack of bank funding and a poor outlook given an upcoming glut of supply and forecasts that any recovery from last year’s recession is likely to be moderate.
“There are many groups here but they generally can’t invest reasonable amounts of funds at reasonable prices,” says one agent representing foreign investors. “But eventually the realisation will have to come that they have to liquidate at prices the market can bear.”
Wenzhou entrepreneurs usually take two to three such shopping sprees to global real estate markets each year, says Mr Zhou, noting that investors from this eastern Chinese city visited France, Germany and the US last year, looking for property bargains from the financial crisis.
Wenzhou already has strong links with Dubai. Of about 150,000 Chinese citizens living in Dubai, nearly 20,000 are merchants from Wenzhou, Mr Zhou says. They run small businesses and have invested in real estate, including at least Rmb5bn ($732m) worth of properties hit hard by the debt crisis. These investments have so far produced losses of Rmb1bn, he says, but notes this is a small amount compared to what Wenzhou’s millionaires have earned there.
Compared to eastern China, Dubai properties are a steal. “In Wenzhou, residential properties are priced at Rmb60,000 per square metre, but a single square metre in [Burj Khalifa], the world’s tallest building, costs only Rmb70,000 at the moment. Why not buy them when they are still cheap?” Mr Zhou says.
An article posted on the Chinese Ministry of Commerce website says one Wenzhou entrepreneur, Hu Bin of Shanghai Zhongzhou International Group, invested $28m to buy an artificial island in Dubai in 2007, but construction on the island has been suspended due to the global financial crisis.
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China is expending its country area in some new ways.
One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.
Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.
“We must do our best to intensify self-discipline among internet media to guarantee internet security,” he said.
China’s government demands self-censorship – which it calls “self-discipline” – from internet companies. Although Mr Wang did not mention Google by name, his remarks were being seen as Beijing’s first response to the US internet company’s threat to exit the country.
Google said on Tuesday that an attack by hackers out of China on its corporate systems and attempts by the Chinese government to tighten internet censorship over the past year had led it to reconsider its activities in the country, and it was prepared to pull out if it was not permitted to run its local service without further censoring.
In a lengthy statement published on a government website, Mr Wang said China was facing new challenges in regulating the internet as, among other factors, in the Web 2.0 era internet users were no longer just recipients but also creators of information.
In response, internet media were required to guard online news even more actively, he said. “Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.
Mr Wang’s statement also served to explain some of the government’s censorship moves over the past year, one reason that led Google to conclude that the operating environment in China had become untenable.
Since late 2008, Beijing has been cracking down on online content in a campaign it says is aimed at erasing pornographic “and other harmful” content.
Over this period, thousands of websites and blogs, including many featuring criticism of the government rather than pornographic material, were closed and thousands arrested. Several Chinese social media sites were shut and foreign ones such as YouTube, Facebook and Twitter blocked.
“The importance different countries attach to internet security is different,” Mr Wang said. “We must …, from the angle of national security, information security and cultural security, actively respond to the challenges in internet security and … find a path of internet development with Chinese characteristics.”
The information chief also addressed concerns over cyberattacks but depicted China as a victim rather than a perpetrator as alleged by Google.
“China is a victim of hackers and resolutely opposes hacking,” he said. “To maintain internet security, we need international cooperation and close co-ordination.”
Tom Hoenig, president of the Kansas City Fed, on Thursday warned against keeping rates too low for too long.
“Experience both in the US and internationally tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future,” he said. Mr Hoenig rejected Mr Bernanke’s argument that the Fed decision to keep rates low after the dotcom crash did not contribute meaningfully to the housing and credit bubble. “Low interest rates contributed to excesses,” he said.
Arguing that economic data are always mixed during the early stages of a recovery, he called on the Fed to “more evenly weigh our short-run concerns against the longer run costs”.
Separately, the Financial Times can reveal that the optimal interest rate in the US has moved above zero, according to a rule of thumb for monetary policy cited by Federal Reserve chairman Ben Bernanke last weekend. The rule of thumb is a version of the so-called Taylor rule, which relates interest rates to unemployment and inflation. It was shown on a chart included in Mr Bernanke’s presentation to the American Economic Association, in which he defended the Fed’s decision to keep rates low after the dotcom bust.
The chart suggested the optimal rate moved above zero around the middle of 2009. On the same basis, the optimal rate is almost certainly above zero today – even though the Fed has kept US rates steady at zero to 0.25 per cent.
The fact that this rule of thumb suggests rates should be above zero highlights the turnround in the situation confronting the Fed since early 2009. At that time, a similar Fed staff analysis suggested the optimal interest rate was minus 5 per cent. The difference reflects the impact of the Fed’s gigantic asset purchase programme and other factors that boosted the outlook for the economy, unemployment and inflation.
The finding is notable because the version cited by Mr Bernanke is forward-looking, uses the Fed’s own forecasts and uses the central bank’s preferred measure of inflation, the personal consumption expenditure deflator. In his speech, Mr Bernanke said such a version was “a more useful benchmark” and “guide to appropriate policy” than the versions of the Taylor rule that used current unemployment and consumer price inflation.
The recommendation of a single rule of thumb does not mean that rate increases are imminent. Fed policy is based on judgment and puts weight on risks as well as the possibility that the neutral interest rate that neither stimulates nor slows the economy can change over time.
The Federal Open Market Committee reiterated in December that it expected to keep rates at “exceptionally low” levels for an “extended period” – commonly interpreted as at least six months. But the rule of thumb suggestion that the optimal rate has risen above zero does underscore the fact that it is no longer unambiguously clear that rates should stay near zero for a very long time.
TOKYO, Jan 8 – Japan’s new finance minister backed off his call for a weaker yen following an apparent rebuke from the prime minister on Friday, saying currency levels should be determined by markets.
Still, Naoto Kan said the government should pay heed to the views of the country’s business community, signalling that he was sticking to the view of favouring a weaker yen to boost the competitiveness of Japanese exports.
”Currencies undoubtedly should be determined by markets,” Kan told a news conference. ”But I also believe that generally speaking, it’s the finance minister’s job to act against currency moves when needed.”
The dollar slid to 93.13 yen from around 93.30 yen when Kan said markets should decide currency rates.
But it climbed back up to 93.32 yen when he said it was the finance minister’s job to respond to currency moves, and extended gains to hit a four-month high of 93.78 yen.
Kan, 63, formerly National Strategy Minister, was named finance minister on Wednesday, replacing 77-year-old Hirohisa Fujii, who stepped down for health reasons.
He jolted markets in his first press briefing as finance minister on Thursday, saying he hoped the yen would weaken further and that he would work with the Bank of Japan to achieve an appropriate exchange rate level.
He said many Japanese firms were in favour of having the dollar move around 95 yen. That contrasted with Fujii, who had indicated he favoured a strong yen.
It is extremely rare for a finance minister to refer to specific exchange rate levels and Kan’s comments earned a rebuke from Prime Minister Yukio Hatoyama, who said on Friday the government should not comment on currency rates.
”The government should basically not comment on foreign exchange,” he told reporters.
Kan’s comment may not sit well either with some of Japan’s peers in the Group of Seven, which has been promoting currency flexibility to try to fix global economic imbalances.
Indeed, France said it would put currency imbalances at the centre of its presidency of the G8 and G20 in 2011.
”Kan understands it’s not a good idea to upset the United States by giving the impression that Japan would do anything to weaken the yen. He is now trying to strike a balance, although he believes in a weak yen,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
”He will likely try to avoid raising the spectre of currency intervention for the time being, but if the dollar drops below 90 yen, he may start making verbal warnings.”
The world’s most developed countries have struggled to resolve currency tensions which were thrown into focus by the global economic crisis, despite calls at a summit meeting in Pittsburgh last September for these issues to be tackled.
Ironing out the imbalances – principally huge current account surpluses in countries such as China and deficits in the United States and elsewhere – was seen by many economists as requiring a weaker dollar and a stronger yuan.
A weaker yen would provide some respite for Japan’s exporters, who had to deal with a yen at 14-year highs of 84.82 per dollar in November.
The exports industry is slowly picking up and helping the world’s second-largest economy emerge from its worst post-war recession. Major exporters, including Honda Motor Co, have complained about the high level of the yen.
The Bank of Japan’s influential tankan corporate sentiment survey showed in December that Japanese big manufacturers expected the dollar to be 91.16 yen on average over the six months to March.
Since being named as finance minister on Wednesday, Kan has also faced scepticism from the bond market that he will keep as tight a rein on spending as his predecessor.
He said on Friday he was mindful of fiscal discipline while stressing the need to balance the restoration of the country’s fiscal health with spending to support the economy.
A weaker yen, high share prices and doubts about Kan’s commitment to fiscal discipline, helped send 10-year Japanese government bond futures to their lowest since mid-November.
Heatwaves, trade wars and a World Cup victory for Brazil
Published: December 30 2009 22:13 | Last updated: January 1 2010 13:35
Once again, the Financial Times’ top pundits have assembled to pit their wits against the fickle future. Some of them are recklessly putting years of calm reflection and carefully built reputations at stake, piling up their chips on what they foresee for 2010. Others are simply taking a punt, going for broke as they scramble to soothe their bruised egos after some big misses last year.
A wooden spoon goes to Ed Crooks, who predicted that oil would end the year below $40 (it is nearly double that). Clive Cookson joins him in ignominy, having predicted that scientists would produce artificial life. No such luck. But, to give them credit, both are back in the hunt this year. Chris Cook
Will the UK suffer a double-dip recession? No. Such a definitive answer is dangerous: we still know very little, but here are the reasons why the outlook for 2010 is somewhat rosier than for 2009. The flow of economic news since March has been surprisingly good. The British labour market turned the corner late in the summer. Sterling’s fall provides scope for exporters and a substitution of imports. Although fiscal policy is being tightened, it is loose and likely to remain so. The global economy is expanding strongly again and households show little sign of a sudden urge to save. Chris Giles
Will the UK government sell any of their stakes in the banking sector? No. As a result of a weaker than expected economic recovery, plans to begin the sell-off of banking stakes, including the “good” part of Northern Rock, and chunks of Lloyds Banking Group and Royal Bank of Scotland, will be put on hold. The weakness of bank share prices (including those of Lloyds and RBS, which remain below the government’s average price of investment) is the main obstacle. But there is also a crucial lack of investor appetite, both among sovereign wealth funds and UK institutions. All in all, the Labour government, at the start of the year, and the whatever administration emerges from the hung parliament thereafter, will conclude that any hope of a short-term divestment of the bank stakes is doomed. Patrick Jenkins
Where will oil finish the year? I observed a year ago that the oil market often made fools out of forecasters, and then proved myself right with a dreadful prediction. I underestimated the strength of the recovery in Chinese demand and Opec’s discipline. This year, those forces will be tested again – and the continued recovery in demand, led by developing countries, is likely to be matched by increased flows from Opec. The result is that oil is most likely to end the year within its present trading range of about $70-$80 a barrel. But after last year, caveat lector. Ed Crooks
Should investors put their money into the stock market? Yes. Cash will continue to yield almost nothing, gold is overvalued, and there is a risk of a sell-off in government bonds as quantitative easing ends and fears over sovereign creditworthiness mount.
Next year’s stock market gains will be less spectacular than 2009’s. The liquidity that supported so many asset classes this year will subside in 2010 as exit strategies are implemented and interest rates start going up. At that point, fundamentals will start to reassert themselves.
Not that the fundamentals are bad for equities, given improving corporate profits, reasonable valuations and the likelihood of a higher pace of takeover activity. But the predominant mood will be one of caution and there will be plenty of things that could unsettle shares, from a bond market sell-off to a double-dip recession. Chris Brown-Humes
Will there be a trade war in 2010? Conflict, yes. Full-blown war, no. Trade wars aren’t what they used to be. Time was when they were full-on pitched battles, with each side exchanging artillery fire in the form of reciprocal tariff increases. These days, trade conflicts resemble guerrilla war with damage inflicted through a wide variety of means.
The weapons are a selection of improvised devices – technical standards that keep out imports, government procurement rules such as “Buy China” and “Buy America”, automotive and financial bail-outs that favour domestic companies, “countervailing duties” intended to negate the effect of subsidies abroad. But with global commerce recovering after the huge drop during the financial crisis, they will not this year have a serious impact on actual trade. Alan Beattie
Will the eurozone experience a sovereign default in 2010? No. Prior to the crisis, markets ignored the relative riskiness of eurozone countries’ sovereign debt. This is true no longer. On December 18 2009, spreads on Greek bonds had reached 273 basis points and on Irish bonds 160 basis points. These were followed by Italy on 84 basis points, Portugal on 79 and Spain on 71.
Yet none of these countries will be forced into a default, for two reasons: first, the pressure to sort out the public finances from within the eurozone is intense – not to do so would turn both the guilty country and its leadership into a pariah; and, second, it is unlikely that any government would be permitted to default. It would be rescued and then forced to adjust its finances anyway.
Since a clean default is impossible, governments will have no choice but to retrench, however painful the consequences. Martin Wolf
Will we remember who Herman Van Rompuy and Baroness Cathy Ashton, are by the end of the year? Yes. The new president of the European Council and the EU high representative for foreign and security policy can hardly avoid raising their profiles, because they are starting so low. They are not household names but they have big jobs that will thrust them into the limelight.
If Mr Van Rompuy, the former Belgian prime minister, keeps writing haiku on how to knock heads together at European summits, he might get a publisher. And Lady Ashton will be hopping on and off aircraft from Tehran to Tel Aviv and Beijing to Moscow, refreshing European foreign policy with a feminine touch. She will be noticed, in part, because it will be a relief not to have another man in a suit or, this being the EU, a troika of men in suits. David Gardner
Who should I bet on in the British general election? Forget David Cameron’s Conservatives; pity Gordon Brown’s Labour. Put your money instead on Nick Clegg’s Liberal Democrats. No, I don’t think Mr Clegg is about to sweep into Downing Street as the leader of the first Liberal government for a century. The firm prospect – to my mind as near a certainty as you can get in politics – is that Mr Cameron will be the next prime minister. But those who fancy a wager should look at the odds on the third party.
The betting suggests that Mr Clegg’s party will lose 15 or so of its present 60-odd seats in the Commons – mainly to the resurgent Tories. My guess is that they will do better – matching seats lost to Mr Cameron with gains from Labour. So will Mr Clegg hold the balance of power in a “hung parliament”? My guess is No; an electorate that has pretty much decided to sack Mr Brown’s government is likely to give the Tories an overall majority. Philip Stephens
Will the UK be at war with the rest of the EU by this time next year? The Conservative party is likely to win the next UK election and will be committed to repatriate powers over social policy from Brussels. That will require lengthy and unpopular negotiations, and cause a probable backlash from the other EU members.
But David Cameron is unlikely to seek confrontation from the start: he will try to find a pragmatic solution that will still satisfy the eurosceptic majority in his party. Skirmishes are likely but open warfare, if it comes, will have to wait while the economy is fixed. Quentin Peel
Will Putin declare his candidacy for Russia’s presidency? Mr Putin will not formally declare his candidacy until closer to the election date but it seems likely that over the next 12 months he will send ever-stronger signals that he intends to run for the presidency in 2012. In one sense, it does not matter. He rules the roost even from his present seat as prime minister. But, for political gossips in Moscow, 2012 is the hottest topic around. So expect guessing games throughout the year, and much clearer signals that the prime minister does indeed intend to return to the presidency.Stefan Wagstyl
Will the world make progress on nuclear disarmament? Yes. In 2010, nuclear disarmament will provide a rare example of a piece of international diplomatic progress. This is partly because there are really only two big players that need to agree. Between them, the US and Russia account for 95 per cent of the world’s nuclear warheads. Quite soon – perhaps in January – they are likely to reach an agreement significantly to reduce deployed warheads.
Later in the year, they could build on this agreement by including battlefield nuclear weapons in arms reduction talks. A US-Russia accord could also have a positive spillover effect on the United Nations conference in May that will review the Nuclear Non-Proliferation treaty. The NPT regime has come under strain in recent years – with India, Pakistan, Israel and North Korea all developing weapons. Disarmament by the status quo nuclear powers may make it easy to patch it up. But don’t get carried away. The world will not come closer to cracking the most serious nuclear problem of all – Iran’s drive to develop nukes. Gideon Rachman
Will this be the year that Israel bombs Iran’s nuclear installations? No. Israel, the US and European powers will become increasingly alarmed in 2010 by signs that Iran is close to developing a nuke. Iran will make significant progress, for example, in developing its enrichment programme, defying world opinion. But Israel knows a strike on Iran’s nuclear facilities remains a big risk, not least because Tehran now has the ability to counter with effective ballistic missile attacks on Israeli cities. This time next year, the question on world leaders’ minds will no longer be when Iran gets bombed, but when Iran gets the bomb. James Blitz
Will Pakistan’s president Asif Ali Zardari see out the year in office This is a risky one to predict given Pakistan’s history of military rule, an intensifying conflict against the Taliban and Mr Zardari’s long tussle with corruption allegations. I’ll wager he does survive in spite of his fragile tenure on the strength of having ridden out a turbulent year that could easily haveunseated him.
When the husband of slain Benazir Bhutto entered the presidency little more than a year ago, few gave him more than a couple of months in the job. Far from an example of inspiring leadership, Mr Zardari has managed to preserve civilian rule in the face of Taliban advances into Pakistan’s heartland, a political crisis precipitated by lawyers’ protests and a clumsy effort to neutralise opposition leader Nawaz Sharif and a cold shoulder from India.
Within the confines of the presidential palace, Mr Zardari cuts a Miss Havisham-like figure sitting in a dimmed room (the windows have been filled in as protection against attack) surrounded by pictures of his late wife. Yet, Pakistan’s accidental president has shown unexpected resilience, and some courage.
The odds are stacked against almost any civilian ruler in a country where the locus of power is so unclear, even to Pakistanis themselves. But the army’s reluctance to take up the reins of government and flows of US aid money and military assistance should keep Mr Zardari in place for some months to come, albeit with the curtains drawn. James Lamont
Will Afghanistan turn into Obama’s Vietnam? No. Vietnam was a much larger war. For several years there were upwards of 400,000 US troops based in Vietnam, against a peak in Afghanistan of 100,000 troops by next autumn. The war in Vietnam was partly lost at home because of the massive backlash against the draft – a measure it is virtually inconceivable Mr Obama would adopt for Afghanistan. What is more, Mr Obama has diluted and blurred the threshold for victory in Afghanistan, giving him a great deal of leeway to pull out without a total loss of face. Furthermore, everyone in the White House has read up about Lyndon Johnson’s travails and is terrified of repeating them. Far likelier, therefore, that they make quite different mistakes – such as pulling out too soon and leaving a vacuum in Afghanistan that could risk war between Pakistan and India. Edward Luce
Will the Republicans make a comeback in 2010? Certainly. In the US midterm elections, they will take seats from the Democrats. The real question is, how many? Voters have soured on the Democrats since their comfortable victories in 2008. Independents who voted for them are disenchanted and many left-leaning liberals are angry. But have the electorate’s feelings changed enough to overturn the Democratic majorities in the Senate and House of Representatives? No.
A Republican majority in the Senate, though possible, would be astonishing, because relatively few Democratic seats are up for grabs there. (The Democrats will be much more vulnerable in the Senate in 2012.) The Republicans can hope to pick up four seats, reducing the Democrats from their present filibuster-proof 60 (counting independents) to 56.
In the House, the Republicans will win back the seats they lost in 2008, which is halfway back to a majority, and then some. They could give the Democrats a real scare if the economic recovery fails to gather pace and the president’s popularity slides any further – but things would have to get much worse than now to make Republican control of the House a realistic prospect. Clive Crook
Will bonuses in Wall Street and the City of London be cut? No. Executives at the top of banks had to make some sacrifices in response to government pressure and public anger in 2009 – John Mack, chairman of Morgan Stanley, gave up his bonus entirely for the third year in a row. Although the UK and French governments have imposed 50 per cent bonus supertaxes to cover payments for 2009, that will not be repeated. Governments remain wary of driving banks abroad. Investment banks are back making money again and there are few signs that bonus structures will be curbed permanently. Their business model still depends on high remuneration for big revenue generators. What will continue is a move towards paying big bonuses in shares that cannot be cashed for several years. Regulators, executives and shareholders of banks all think this is a way to curb short-term risk-taking. John Gapper
Who will win the football World Cup being held in South Africa? There is a pattern to World Cups, which is why the most likely winner of the next one is Brazil. The country usually has the best individual players and, since 1970, has absorbed the dull but effective European style. And when the World Cup isn’t in Europe, Brazil usually wins. However, football today has two superpowers. Spain’s victory at Euro 2008 was no accident. Since 2000 Spain has lost just 12 per cent of its games, a performance as good as Brazil’s in spite of having only one-quarter of the population.
The dark horse of this World Cup is the US. In the long run, population size and wealth correlate with success in international soccer. The US has more young people playing soccer than any other country. Its national team has risen to a position just below the global top 10 and at last summer’s Confederations Cup it surprised Spain in the semis and scared Brazil in the final. By contrast, avoid sentimental bets on African teams. Simon Kuper
Will 2010 be the hottest year globally in recorded history? Climate change sceptics frequently point out that 1998 was the hottest year since measurements began. If the world is warming, why has the record not been broken, they ask.
Scientists say 1998 was so hot because of the exceptional El Niño warming of the tropical Pacific Ocean that year. With another El Niño apparently developing now – and superimposing its effect on man-made climate change – it is more likely than not that 2010 will beat the 1998 record, according to the much-maligned but often accurate UK Met Office.
Although a big volcanic eruption or El Niño’s sudden death would cool things down, I’ll go for the big heat. Next year’s global average temperature will be the highest on record – which may give renewed impetus to international action against global warming, after the Copenhagen fiasco. Clive Cookson
Will there be progress on a climate change agreement? Shambolic scenes at Copenhagen masked the fact that the deal was not that bad. The vast majority of governments – including the biggest emitters, developed and developing – agreed to limit their emissions and to financing targets. If diplomats had been told beforehand that this would be the outcome, they would have danced for joy.
But flaws marred the accord, and resolving them will be the task for this year. Countries did not set out emissions targets in full, deferring that to January 31; a small group prevented the formal adoption of the accord; there was no timetable for turning it into a legally binding treaty.
Fevered diplomacy in the next few weeks will concentrate on the first, trying to get countries to up their emissions targets. Reforms to the UN process should make it easier to gain consensus. But the third will be hardest. China refused to sign up to a legally binding treaty, even one that only encapsulated commitments already made. Will that be resolved by the end of 2010? No. Fiona Harvey
What will life be like after Lula? Brazil was one of the first countries to return to growth after a brief recession and many believe it is on a secure course to become the world’s fifth-biggest economy by 2020. But Brazil still needs market oriented reforms of taxation, pensions and education. Who becomes the next president matters a lot. The choice is almost certain to be between José Serra of the centrist opposition PSDB and Dilma Rousseff of President Luiz Inácio Lula da Silva’s leftwing PT.
Both are technocrats with little charisma. But they are different. Mr Serra believes in efficient government. Ms Rousseff, apparently, believes in big government. My prediction is that Ms Rousseff will win – and that Brazil’s current cycle of growth will run out of steam in three to four years. Jonathan Wheatley
Published: January 4 2010 03:47 | Last updated: January 4 2010 07:51
Asia’s rapid recovery from last year’s recession appeared to be confirmed on Monday by a slew of positive reports on industrial production that suggested economic growth is powering steadily ahead, led by China and India.
Even a worse-than-expected fourth-quarter contraction in Singapore’s gross domestic product failed to dampen the optimistic mood, with economists writing off the setback in the city-state as a consequence of pharmaceutical industry volatility.
The China Manufacturing PMI, produced by HSBC and Markit Economics, rose to 56.1 in December, up from 55.7 a month earlier – the second fastest rise yet recorded by the survey, which dates back to 2004. The average rise for the fourth quarter of 2009 as a whole was also the fastest yet recorded.
The closely watched survey pointed to a ninth consecutive monthly expansion in new order volume, with companies reporting buoyant demand in both domestic and export markets. The growth in export orders was the fastest since March 2005, reinforcing a positive trend that began in the second half of last year.
The HSBC index confirmed the strong trend suggested by the official PMI numbers, released on January 1, which showed manufacturing activity expanding in December at the fastest pace for 20 months. The two series are not directly comparable because they use different methodology.
However, the HSBC date also signalled that prices charged by Chinese manufacturers were rising at the fastest rate since July 2008, buoyed by rising raw material costs as well as strong demand.
Grace Ng, economist at JPMorgan in Hong Kong, said the two PMI series taken together suggested that China’s manufacturing sector was experiencing a strong recovery, supported by broad-based demand growth.
“The manufacturing order to inventory ratio continued to stay at about the highest level since April 2008, suggesting that, with further steady recovery in final demand conditions, solid sequential trend growth in the manufacturing sector will continue in the coming months,” she said.
The India Manufacturing PMI, compiled by HSBC and Markit, rose from 53 to 55.6, its highest level since May, when it hit 55.7, the strongest performance of 2009. The positive result was helped by a big rise in the sub-index for new orders, which rose to 60.1, the highest for the year, from 54.6 in November.
The India PMI has now been above the neutral level of 50 for nine consecutive months, indicating a sustained period of expansion, following a five-month period when it suggested that output was contracting.
HSBC said the detailed December survey data suggested that growth was the strongest for 15 months, driven by better economic conditions and business investment. Demand from both domestic and foreign buyers was higher than in November, although the home market remained the principal driver of new business expansion.
The data will ease concerns that India’s manufacturing sector might have been slowing, although HSBC said many companies remained cautious about the durability of the country’s economic recovery.
The South Korea manufacturing PMI, also produced by HSBC, edged up slightly in December to 52.8 from 52.6 in November, indicating a continued expansion of the economy, although the pace appeared to be slowing.
The sub-index for total new orders fell from 54.1 to 52.9, and the index for new export orders declined from 52.4 to 50.7. However, both remain in positive territory. Any figure above 50 indicates growth in the index, with any figure below 50 indicating a decline.
In Taiwan, the manufacturing PMI, produced by HSBC and Markit, moved upwards for the ninth successive month, reaching 58.7 from 58.4 in November. The index showed strong demand in both export and domestic markets, although the rate of increase in new orders edged downwards.
In Singapore, the Ministry of Trade and Industry said the economy contracted by 6.8 per cent in the fourth quarter on a seasonally adjusted annualised quarter-by-quarter basis. Compared with the fourth quarter of 2008, the economy grew by 3.5 per cent. It declined by 2.1 per cent for 2009 as a whole, in line with government and private sector expectations.
The MTI said the fourth-quarter setback was caused by a 38.4 per cent contraction in the manufacturing sector, on a quarter-by-quarter seasonally adjusted annualised basis, following an expansion of 29.6 per cent in the third quarter.
The ministry said the decline was mainly due to a contraction in the output of the biomedical and transport engineering industries. Electronics, chemicals and precision engineering posted positive growth.
Robert Prior-Wandesford, economist at HSBC in Singapore, said the numbers did not signal a return to recession, even though the quarter-by-quarter contraction was larger than consensus forecasts.
“Pharma production is notoriously volatile, as companies often shut temporarily to swap product lines, and is likely to bounce back strongly in early 2010. Production will also be boosted as a couple of new facilities are set to open during the year,” he said.
In Tokyo, Yukio Hatoyama, the Japanese prime minister, said his top priority was to stop the economy slipping back into recession by passing budget bills for the current financial year and the next.
“With the feeling that the economy must not be allowed to go into a double dip, that we will not allow it to do so … we compiled emergency measures and a second extra budget at the end of last year,” Mr Hatoyama told reporters.
“We want to bring this second extra budget into effect as soon as possible,” he said, adding that next year’s budget should also be dealt with quickly. Japan’s financial year runs to the end of March.
Published: November 10 2009 21:03 | Last updated: November 10 2009 21:03
“A crisis is a strange way to celebrate an anniversary.” This is the wry judgment of Erik Berglöf, chief economist of the European Bank for Reconstruction and Development.* Yet a crisis is what we see in countries that began the march from communism two decades ago. So, has capitalism failed, as communism did? In a word, “no”. Some transition countries are in crisis; transition is not. The same judgment applies elsewhere: capitalist countries are in crisis; capitalism itself is not. But reform is necessary. The great virtue of liberal democracies and market economies is their ability to reform and adapt. They have shown these qualities before. They must do so once again.
For those born, like me, shortly after the second world war, the cold war was the defining intellectual and political struggle of our lifetimes. With the collapse of communism ended a catastrophic epoch of millenarian politics and the delusion of a rationally planned economy. The freedom offered by democracy and the prosperity supplied by markets won. The fact that communism expired not with a bang, but with a whimper, we owe largely to Mikhail Gorbachev.
Yet 2009 is a sobering year from which to look back. A year ago, capitalism careered over a cliff. With vast effort, states have put it back on the road. According to Piergiorgio Alessandri and Andrew Haldane of the Bank of England, in a superb new paper**, the total gross value of interventions on behalf of banks has been $14,000bn (€9,400bn, £8,400bn). This is state capitalism.
What then does the crisis mean for the countries that exited from socialism two decades ago? What, too, does it mean for the world?
For the former, it has meant big falls in output. According to the EBRD, the fall in the gross domestic product of transition countries will average 6.2 per cent in 2009. Declines vary widely: from 18.4 per cent in Lithuania, 16.0 per cent in Latvia, 14.0 per cent in Ukraine and 13.2 per cent in Estonia – depression numbers – to 7.8 per cent in Slovenia, 6.5 per cent in Hungary, 6.0 per cent in Slovakia and 4.3 per cent in the Czech Republic. Poland’s economy is forecast to grow this year, by 1.3 per cent. In general, notes the EBRD, “the size of the output declines correlates with pre-crisis credit booms and external indebtedness”. The bursting of bubbles hurts.
These collapses are real and worrying. But they need to be put in context. First, many countries in transition experienced big increases in output after the initial and largely inevitable post-Soviet collapse (see charts). Poland was the star. In general, the successful countries were those that reformed most seriously. Second, surprisingly perhaps, transition countries have made few reversals of reforms. As the EBRD report notes, “government changes since early 2008 have either led to no change with respect to the reform stance, or indeed favoured pro-reform parties”. This is quite consistent with what is happening in the emerging world, more broadly. The absence of a credible alternative economic model is evident. Populist adventurism also seems unattractive.
As recovery begins to gather force across the world economy, the great legacies of the collapse of the Soviet empire – the integration of much of Europe and the concomitant spread of freedom to Russia’s borders, if not beyond – remain intact.
Yet the crisis brings important lessons. The philosopher Karl Popper laid down the right approach. He distinguished the “piecemeal social engineering” intended to ameliorate specific ills from the “utopian social engineering” intended to transform society in its entirety – an aim that, in practice, “has led only to the use of violence in place of reason”.
The reformer must identify the cause of the malady before attempting treatment. In the case of this crisis, the failure lies not so much with the market system as a whole, but with defects in the world’s financial and monetary systems. Some of these failings are inescapable. The future is inherently uncertain. Big mistakes will be made. Where prevailing paradigms lead to risk-taking on an excessive scale, corrections are likely to be brutal. Where risk-taking involves large-scale leveraging of the balance sheets of the financial sector, corrections are likely to mean a collapse in both intermediation and the economy. Should collapse not be prevented, the consequences may, history tells us, be dramatic.
Happily, governments and central banks have learnt the lessons of the 1930s and decided, rightly, to prevent collapses of either the financial system or the economy. That is precisely the right kind of “piecemeal social engineering”. Similarly, big efforts have been made to rescue the crisis-hit countries of central and eastern Europe. Thus, support from the International Monetary Fund and the European Union has been between 4 and 6 per cent of GDP (or more) for the four eastern European countries that have accepted IMF programmes.
A similar pragmatism must now be shown in completing the escape from the crisis. That will require substantial rebalancing of global demand. It will also require further reforms. For transition countries, a reversal of financial integration is likely to be costly and unnecessary. The principal goals of reform must, instead, be to make the economy less vulnerable to shocks and to curb excessive credit growth in future.
Similarly, at a global level, radical reforms must be made in the financial and monetary systems. To put it bluntly, the banking system has been gaming the taxpayer on an intolerable scale. This must end, in one of two ways: the sector must be made subject to the market or become a heavily regulated ward of the state. Again, the curbing of huge credit bubbles must be an integral element in the formation of regulatory and monetary policies. Finally, the dependence of the global monetary system on the currency of an over-indebted superpower is neither desirable nor sustainable.
Anniversaries are a good time for taking stock. The collapse of Soviet communism was a glorious moment. It remains so, despite mistakes and disappointments along the way. But today’s crisis tells us of the failings of a euphoric capitalism. Capitalism will not now perish, as communism did. But the signal ability of liberal democracy is to learn and adapt. We learnt from the 1930s. We must now learn the lessons of the 2000s.
