The beginning of the year is the traditional time to make predictions. WEJ interviewed leading experts in the fields of international relations and world economics in order to find out which trends, prospects, and challenges can be expected to surface in 2014.
The world economy is continuing to grow at a moderate pace, with accelerated growth anticipated in 2014 and 2015. Inflation, as expected, will remain subdued, while the stagnation on the labor market in the 34 OECD countries should gradually resolve itself. But despite the fact that we still see an improvement for global economic growth in the new year, our optimism has been somewhat dampened in recent months, largely due to weakening prospects in many emerging markets.
Some events have undermined the credibility and stability of the market. It is partly because of this that we have lowered our original OECD Economic Outlook, which was published in May of last year; a new version was published in November. The unexpectedly strong reaction caused by summer discussions of the slowdown in asset purchases by the U.S. Federal Reserve is notable. This has impacted developing countries in particular, since their economies are the most sensitive to capital outflows. In addition, the United States has been on the verge of a potentially catastrophic crisis associated with the legal limit on public debt. These events underscore that the potential for growth and employment that we have described in recent forecasts may not be achieved in 2014. In light of these developments, we believe that it is important for politicians not to entertain unnecessary illusions on the basis of improving growth prospects in our baseline scenario. Rather, they should aim to eliminate some of the sources of risk in order to make the economies of their countries more resilient.
As for trends in 2014, we can say that they will remain basically unchanged in comparison with recent years, though with some variations. Overall, the world economy is expected to continue to grow at a moderate pace, which at the very least should be an improvement compared with the growth rate in 2012–2013. The economy of the United States will strengthen as slowdowns caused by the fiscal negotiation process are reduced. Unemployment will also gradually decline, and inflation will remain low. The Eurozone countries have a less positive outlook. On the one hand, the economy of the Eurozone should return to positive growth, and unemployment should stop growing, according to the forecasts. However, the effects of the economic downturn will remain very significant, especially on the periphery. In 2014 economic growth in Japan is likely to slow down due to the fact that significant (and necessary) fiscal consolidation will reduce demand. However, unemployment will remain low and inflation will be positive, which are both very welcome. China’s economic growth is now gaining momentum again after the downturn of late 2012 and early 2013. However, the slowdown is likely to reassert itself for 2014, so that quarterly growth will decrease by the end of the year to around 7.5%.
There are a lot of problems, generally speaking. In the United States, the Federal Reserve should determine the timing and pace for phasing out the monetary stimulus, which, as we have seen, can create turmoil on financial markets around the world. Meanwhile, Congress and the administration must avoid a repeat of the fiscal policy crisis that occurred in October. If a decision is made not to raise the debt ceiling, the impact of this on the U.S. and world economy could be disastrous.
The Eurozone should make great efforts to strengthen the banking system, which remains the main obstacle to growth and a risk to stability. Given the slow and uneven recovery, high unemployment, and inflation well below the ECB target, monetary policy should remain very flexible. It is also necessary to achieve a more symmetrical adjustment of current account imbalances in the Eurozone. Regulation of current accounts is growing, but up until now it has depended too heavily on reducing imports on the periphery, whereas in countries with a surplus there is much less regulation. In Japan, the main objective is reducing the debt burden. Stimulating growth and maintaining confidence in the current policy can be achieved only through robust structural reforms.
Assessing the situation that will shape the global economy in 2014, I would like to focus on the relatively high degree of stability in the world economy. Over the past three years the steps taken by the U.S. and EU governments have led to a fairly sustainable economic recovery, stabilization of energy prices, as well as very mild and limited fluctuations in the major exchange rates. I see no good reasons in the coming year why these trends should not continue.
My outlook is optimistic. The Eurozone will come out of the recession and demonstrate growth in the range of 1.2–1.5%. The United States will “accelerate” to 2.5–2.8%. In China, growth rates will continue to experience a mild slowdown, primarily as a result of the clear market excesses in the construction sector and a certain slowdown in the rate of infrastructural development. The foreign policy situation in the world will remain stable, and regional conflicts will not have a critical impact on the global environment.
Threats look either unlikely or we can expect them to be localized. I believe that the main threat comes from the continued tightening of the monetary policy in the Eurozone, which, in my opinion, is excessive in the current environment. The reduction of inflation to 0.7% year-on-year in October is reminiscent of Japan’s experience during its “lost decade” of the 1990s. The European economy might become significantly disorganized if prices were to stop rising due to continuing decline in demand.
Among the localized threats I would name catastrophic economic development scenarios in “anomalous” countries (for example, a hyperinflationary breakdown, with all the attendant social consequences, in Venezuela; default on obligations in Ukraine; worsening economic problems in North Africa; financial difficulties in the new EU member states); gradually declining prices for many types of raw materials, and in particular metals and coal; a possible initial reaction by the world economy to the shale revolution (primarily by reducing the amount of American investments in Asian economies). However, I am not suggesting that any of these factors will necessarily have a major impact on the global economy.
In the end my prediction is: continued global economic recovery, with an average growth rate of the global Gross Domestic Product in the range of 2.4–2.7%, the price of Brent Crude in the range of $90 to $110 per barrel and the rate of the major currency pairs in the range of $1.32–€1.45.
There is no reason to believe that the tensions in East Asia are waning. In fact, since the end of World War II, the relationship between the two major powers in the region has never been as hostile as it is now. We might witness an escalation before the situation improves. Meanwhile, China and Japan are the second and third largest economies in the world, respectively. And if previously geopolitics had only a limited impact on trade relations between the two countries, now there is every reason to believe that the situation will change.
Concerning the forecast for 2014, in my opinion there are five problem areas that will determine the economic prospects of East Asia over the next 12 months.
1. Risk of mistakes and geopolitical risks: The ongoing dispute between Tokyo and Beijing over islands in the East China Sea, which are known to the Japanese as the Senkaku and to the Chinese as the Diaoyu, will remain in the media spotlight in 2014. At the same time, the possibility of a direct military confrontation continues to grow, especially after China decided to establish an Air Defense Zone over the disputed islands. The U.S. has also become involved in the dispute by confirming its treaty obligations to the security of Japan. Meanwhile, the nuclear ambitions of North Korea present another threat to the region’s security. Since February 2013, when the DPRK conducted a nuclear test for the third time, the regime of Kim Jong-un has not made any further forays in this direction. However, analysts differ about whether this is only a question of time. In addition to its nuclear ambitions, we must not forget about the serious potential of North Korea’s missiles, which also present a serious threat to the stability of the region.
2. The trade deals are larger, and the stakes are higher: East Asia is a region of opportunities. A Trans-Pacific free trade zone would open up new prospects for the region. Negotiations to establish such a trade zone, however, are currently still ongoing. The deadline for the approval of a Trans-Pacific Partnership (TPP) has been postponed to March 2014. If the negotiations are successful, then the TPP will become the largest trade integration agreement in the world. The TPP among the 12 participant countries, including the United States and Japan, will account for about 40 percent of the entire flow of goods and services in the world. In addition, there is a high likelihood that South Korea as well as China will sign the agreement in the long term. Thus, the TPP is a factor that radically changes the rules of trade in the Asia-Pacific region as well as outside it. If successful, the TPP will not only open new markets to an unprecedented extent, but it will also establish new rules on a wide range of issues, including intellectual property, state enterprises, and protectionism. This will, as a result, entail a series of significant structural reforms in the economies of all member states. In addition to the TPP, negotiations will continue to conclude a regional comprehensive economic partnership agreement among China, Japan, and South Korea, though it will not include the U.S. Thus, despite the many political risks, the countries of East Asia will remain committed to the further development and deepening of trade relations with each other.
3. Energy dilemma: East Asia will, as before, remain dependent on imports of energy resources from the most politically unstable regions of the world. In this vein, Japan and South Korea are hugely concerned about U.S. policy on the Middle East and whether this will change as the U.S. becomes more energy independent. In Japan, all 50 nuclear reactors are currently inactive due to a series of disasters in 2011, which eventually led to the major radiation accident at the Fukushima Daiichi Nuclear Power Station. Shutting down all reactors led to a 30% reduction in the power supply and the need to increase exports of fossil fuels. Prime Minister Sinzo Abe continues to insist that the reactors be reactivated, but the public mood is still negative. In general, the accident at Fukushima has prompted both Asian as well as other countries around the world to review their in nuclear energy policies. All of these factors have served as an impetus to the development of alternative energy sources in Japan, South Korea, and even China. China is already the world leader in the production of cheap solar panels, largely due to the fact that industrialized countries have introduced tax breaks and subsidies for these kinds of goods in order to encourage consumers around the world to use more solar energy. To date countries in East Asia are tasked not only with developing renewable energy technologies, but they must also manufacture affordable products in order to ensure that they are used around the world.
4. The demographic time bomb: Almost four decades have passed since China began to carry out its one-child policy, and now the country is experiencing the harsh realities of an aging society. But China’s demographic problems pale in comparison with those of Japan and South Korea, where the effects of the rapid decline in fertility are compounded by an aging population. Thus, the countries of East Asia face the challenge of how to cope with the additional financial burden associated with the increased funding of pensions and public services required by the elderly. This issue is particularly relevant for Japan, where government debt relative to GDP is one of the highest in the world.
5. The challenge of innovation: Whereas the so-called “East Asian miracle” depended on an advanced manufacturing base, future economic growth will largely depend on the development of a knowledge-based economy. The production of quality high-tech products at a lower price can no longer be the basis for national success. Instead, success will increasingly depend on the ability of the country to produce software, to provide unique services, and enhance intellectual capital worldwide. Product ideas that meet these requirements may come about only if conditions permit greater flexibility and diversity and if there is a desire to take risks and try new things. The question is whether the existing Asian models of education and employment meet these requirements. Given that immigration in these countries is not an economic necessity, China, Japan, and Korea will have to rely on their internal capital to meet these needs.
To summarize, it should be noted that any risks impeding growth are offset by opportunities, and therefore the economic prospects of East Asia seem to be very solid. At the same time, geopolitical and structural problems in Japan, South Korea, and China will remain as significant as before. A focus on attaining common goals among the major Asian powers and curbing political conflicts will be key to the economic outlook of the region in 2014.
Nuclear diplomacy will be heavily tested in 2014, with two high-level multilateral meetings taking place in the spring: the third Nuclear Security Summit (NSS) and the third Preparatory Committee (PrepCom) Meeting of the Nuclear Nonproliferation Treaty (NPT). Both are important events where key decisions on how to reduce nuclear dangers will be made.
Building upon the first and second summits, which took place in Washington in 2010 and Seoul in 2012, the Netherlands will host the third NSS in The Hague on March 24-25. The NSS process responds to the risk that terrorist groups could acquire weapon-grade fissile materials. It seeks to secure all nuclear materials worldwide through engagement with heads of state and international organizations.
The priorities for the Hague Summit are six-fold. First, it aims to provide optimal security for or a reduction in the use of highly enriched uranium and plutonium. Second, it will focus on strengthening the international legal regime and, in particular, ratification of the amended Convention on the Physical Protection of Nuclear Material. Third, the NSS will encourage more frequent reviews of state security structures by the International Atomic Energy Agency. Fourth, it will promote national registration and protection of highly radioactive sources. Fifth, it will seek to improve government-industry interface. Finally, the Summit will push for confidence building measures to increase trust in the international protection system. Meanwhile, as has been the case since the Seoul Summit, states will be asked to offer “gift baskets,” i.e., independent initiatives on any given aspect of nuclear security.
This is an agenda that, if successfully implemented, will strengthen nuclear security and lay solid foundations for the fourth and likely ultimate NSS, scheduled to take place in Washington in 2016. It is also an ambitious agenda. Although most states agree on the goal of nuclear security, they have different visions on how to achieve it: proposals by the most zealous states are often deemed “too intrusive” by others.
The second high-level multilateral meeting of 2014 will be the third NPT PrepCom Meeting, which will take place in New York on April 28-May 9. In force since 1970, the NPT aims to prevent the spread of nuclear weapons, promote the peaceful uses of nuclear energy, and further the goal of nuclear disarmament and general and complete disarmament. Every five years, NPT parties meet to review its implementation and, since 1995, the review process has been strengthened with the addition of three PrepCom meetings in each of the three years preceding review conferences.
The 2014 PrepCom Meeting will be the ultimate one of such meetings before the 2015 Review Conference. It will be a crucial event in that it will contribute to setting the tone for 2015, where implementation of the “Action Plan” adopted at the 2010 Review Conference will be reviewed and key decisions on future actions will be made. Unlike any other third PrepCom meeting, the 2014 PrepCom Meeting will initiate the 2015 review process. According to the 2010 Action Plan, the five nuclear weapon states (NWS, i.e., China, France, Russia, the United Kingdom, and the United States, which are NPT-recognized states with nuclear weapons) are required to report at the 2014 event on the progress they have achieved toward nuclear disarmament.
Prospects for the 2014 PrepCom Meeting are not good because US-Russian dialogue on nuclear reductions beyond the 2010 New Strategic Arms Reduction Treaty has come to a standstill and the NWS consultation process, where work has been done on transparency and verification, is unlikely to have enough outcomes to satisfy other states. Meanwhile, there has been no progress toward entry into force of the Comprehensive Test Ban Treaty or negotiations for a fissile material cut off treaty. India, Israel, and Pakistan also remain outside the NPT and North Korea’s nuclear and missile programs have progressed. Although an interim deal has just been concluded with Iran, there are questions as to whether it will be possible to find a final solution in the months ahead. Finally, the requirement to word toward a zone free of weapons of mass destruction in the Middle East has not been met.
In sum, 2014 will be both an important and challenging year for nuclear affairs.
Text: Olga Irisova