A look ahead to 2011

As we can look ahead to 2011, a few economic storm clouds are gathering that could rain heavily on some people.

But there is also cautious optimism that the growth of emerging nations could be strong enough to offset much of the global pain.

This will be the central issue next year for most people, but there will also be a few other things to look out for.

US gridlock

The big political change in the world in 2011 will be the Republicans taking over control of the House of Representatives in America’s Congress on January 1.

With Democrats controlling the Senate, Congress’s other house, and laws needing to be approved by both houses, there is potential for law-making paralysis and gridlock, given the two parties are so bitterly opposed.

This could potentially cause harm at home as economically-helpful policies may not get enacted due to political bickering.

But it could also cause harm abroad if US politicians continue to blame China for their problems (like its artificially low currency) rather than primarily themselves. Such a position could lead to trade protectionism and economic warfare.

It’s the economy

Undoubtedly, the world economy will be the most important issue in 2011. The year will mark the transition from government stimulus efforts post-financial crisis to government austerity measures (spending cuts and tax rises).

These mainly European measures have been announced this year in response to rising borrowing costs for governments, and are an attempt to persuade future lenders that they’ll get all their money back.

The impact of these budget-squeezing measures will come into force next year. Many government-paid workers in Europe will either lose their jobs or see their salaries cut.

This will decrease consumer spending and increase competition for jobs in the workforce, which will also squeeze incomes in the private sector.

It is a recipe for low economic growth and financial hardship. Some economies may even slip back into recession.

On the other side of the Atlantic, America’s housing market is still very weak, preventing people from spending freely or moving to where there are surplus jobs.

The government’s stimulus attempts of housing tax credits and cash for old cars have finished and the new Republicans have little appetite for more.

Fresh tax cuts (in addition to the recently extended ones) may provide some increase in consumer spending.

But now it seems that the only realistic solution to America’s struggling middle class is for businesses to export more, and this will take a few solid years of readjustment.

The big unknown is what effect this slowdown will have on emerging markets. Are they still too reliant on western demand for their locally-made products? Or are they now strong enough to provide each other with demand and growth?

If the answer is the latter then it’s good news for the West because they will keep the wheels of the global economy moving while rich countries get their finances in order and start creating new products that emerging countries want.

It’s an uncertain question but the answer will probably become known in 2011 when the private sector has to take over the economic reins from governments.

The other issues

In the Middle East, peace talks have collapsed between the Israelis and the Palestinians over continued Israeli settlement building in the West Bank.

The frustration and resentment caused by this could escalate into conflict at some point during the year.

The crucial counter force is the Fayyad plan for creating a Palestinian country, which is due to be completed in late 2011. This could provide both the hope and employment that is needed to prevent a third intifada (uprising) from materialising.

The scrap over Iran’s nuclear ambitions could get heated. President Obama has a preference for talking and sanctions but he could be pressured into using military force by politicians at home and abroad if suspicions get high.

In Afghanistan, the American plan is to start pulling troops out in July. But Obama may be advised by General David Petraeus to push back the deadline based on conditions on the ground. This will prove politically difficult given it’s already America’s longest war.

On climate change, the recent progress made in Cancun has raised hopes that a legally-binding agreement on emissions reductions might be possible in South Africa in November. But given America’s opposition, this still remains improbable.

And finally, Wikileaks will continue to leak secret information unless potential whistle-blowers have been discouraged by the rough prison treatment received by Bradley Manning, the suspected source of the classified American documents.

But for most people, 2011 will be about coping and hoping: coping with the flow-on effects of the massive government belt-tightening in the rich world, and hoping that the emerging market economies can prove strong enough to save the day.

By The Casual Truth