Saturday Morning Musings - the 2016 global outlook

The first post for 2016. I wish you all a happy new year.

Over at his place, Winton Bates applies his economist's eye to the question of new year resolutions. I am going to avoid the trade-offs involved with making new year resolutions by not making any, or at least keeping them private! However, I do hope to continue to pursue my various interests including Australian art. There is just so much to learn.

Regular readers will know that I like to record my prognostications because they provide a framework for my thinking and writing. Sometimes its damn embarrassing when I get things totally wrong, but then I can ask why I got them wrong! So this post looks at some of the things I will be watching in 2016.

2015 saw the European Union face a series of rolling crises, culminating in the migration/refugee crisis at the end of the year. The scale here is hard to visualise properly. It's not the largest refugee crisis in human history. I think that sad record is held by the partition of British India where some 14 million were displaced. However, from a European perspective, its the largest moment of people since the Second World War.

The crisis poses an enormous almost existential challenge to the EU. Its resolution will affect the form and structure of the EU as an operating entity including the Schengen Agreement. 2016 will also see the UK referendum on membership of the EU, probably during the European summer. This is probably more important to the UK than to Europe itself. The EU can survive without the UK. It's less clear that the UK can survive without Europe. A UK withdrawal from the EU might well act as a further trigger to the internal forces that have threatened to tear the exiting entity apart because both Northern Ireland and Scotland would be adversely affected.

Doubts about the future of the EU has been a common theme in the reporting and commentary on the various European crises of 2015, with sometimes gleeful predictions of a break-up of the EU. I would be very surprised if that happened. As I have explained in previous posts, the model that I have used to understand some EU dynamics is the Federal model for the EU is an evolving Federation; the term Union is a misnomer. Applying this model, I expect Europe to muddle through through with some strengthening of central power.

2015 was the year of ISIS and terrorism. In my writing, I have tried to emphasise the need for perspective, in part to avoid further erosion of the principles of freedom central to liberal democracy in the name of keeping us safe, in part to avoid the distortion in thinking and policy making that comes with extreme rhetoric. I think that that battle has already been lost to some degree, although I do not expect the more extreme responses that we see in some of the more extreme European radical right wing parties, the Australian far right or indeed in Donald Trump in the US to triumph. The probability, certainty, is that there will be more terrorist attacks in 2016. How individual countries and the world responds will be something to watch.

The position in the Middle East can best be described as chaotic, creating strange bed fellows. While I have some reservations about this piece by Seymour Hersh, it does bring out some of the shifting complexities involved. I do not pretend to be an expert on international relations, but what can we say if we apply some best guess judgments?

It seems fairly clear, I think, that ISIS will cease to exist in a territorial sense. It's just going to be ground away. Beyond that? This is where the position gets very confused in my mind. My best guess would be that we will see the maintenance of existing state boundaries, if with accommodations to placate minority groups as well as other vested interests. The Assad Government will survive for the present, but there will be some transition of power in either 2016 or 2017. The relative power and influence of both Israel and Saudi Arabia will continue to weaken, if for different reasons. Iran's position will depend upon the actions and reactions of its governing systems. Played carefully, its influence will be at least consolidated and may increase.

At this point, I need to diverge into economics. From an Australian perspective, prices for natural gas, iron ore and coal are very important. Most projections suggest some weakening in the global economy over 2016. That plus increased production means that oil and natural gas prices are likely to stay low for the immediate present. This means reduced returns from the Australian LNG plants now coming on stream. It also places pressure on oil dependent exporters including Russia, Saudi Arabia and the Gulf States.

Saudi Arabia is already experiencing growing budget deficits at just the time when general spend and especially defence costs including the Yemen excursion are rising. The country needs to restructure and has begun to do so, although the strategic challenges facing the ruling family are substantial. I may be wrong, but I think that these challenges are one of the key drivers of current international policy, including the attempt to create a global anti-terror alliance. Saudi Arabia has considerable financial reserves, oil prices will rise, but the challenge is there.

Russia is a second country affected by oil prices. Commentators debate the extent to which Mr Putin is affected by strategic as opposed to tactical considerations. I think that Mr Putin's Ukraine adventure was to some degree a strategic error, while Russia's involvement in Syria has been a considerable strategic success.

In the Ukraine, Russia gained Crimea, but the Eastern Ukraine intervention has bogged down with Mr Putin apparently not wanting to take matters further. To the degree that his strategic objective was to assert Russian influence, to divide Europe, he has succeeded, but at considerable economic cost. The involvement in Syria seems far more strategically important, reestablishing Russia's position after Ukraine. Again, there is a question of money. The Russian economy is now in considerable trouble. I just don't think that it can provide the resources to support President Putin's apparent objectives.Mind you, that won't stop him trying.

The contretemps between Turkey and Russia strikes me as a significant strategic error because of the costs to Russia. At the same time, Turkey has emerged as a strange wild card in the whole equation, one that must be watched in 2016. I am not sure of President Tayyip Erdoğan's  objectives beyond the newspaper reporting. Erdogan's period as Prime Minister strikes me as a considerable success. However, as president he has set Turkey on a path which does not have a clear outcome, where the risks to the country seem to be rising all the time.

Returning to the global economy, iron ore and coal are down as well as oil, again both important to Australia. Iron ore will likely stay down. Some production is dropping out, but existing lower cost mines are ramping up. Coal is a different issue because there are so many existing high cost producers in the market.

Coal production can be broadly divided into metallurgical and thermal coal. Demand for the first depends upon steel making which is down. Demand for the second depends on the use of coal in power generation. Yes, the second is affected by the responses to global warming, but for the present it is (I think) less cyclical It takes time for coal fired generators to be replaced by other energy sources, so I expect thermal coal prices to bounce before metallurgical coal as higher cost producers phase out.  Perhaps Nathan Tinkler is not so wrong in trying to pick up distressed thermal coal assets.

For both types of coal, Chinese economic growth is critical. as it is for the global strategic balance. In economic terms. I expect Chinese growth to continue to slow because of the continuing imbalances in the Chinese economy. This will affect both commodity demand and China's global reach. I don't think that the second will matter in 2016. China will continue to pursue its global strategic objectives along two dimensions.

Domestically, the aim remains state stability. This has international effects in areas such as the fight against terrorism. China will join with efforts that defend existing borders and which contain separatist threats such as that posed by the Uyghur minority. Internationally, China will continue to extend its influence and to assert its right to be heard in areas that it perceives to be important such as the South China sea.

The Great Silk Road initiative, something that I have written about, actually combines domestic and international objectives. It aims to protect Chinese domestic stability, while also extending China's international economic reach. This is an area where China and Russia's strategic objectives coincide at this point, so it's an area to watch in 2016.

Africa was once called the dark continent because of  Europe's lack of knowledge of the continent. It remains the dark continent so far as Western news coverage is concerned. Coverage is better in North or Saharan Africa because of its closer proximity. Here the two countries to watch are Egypt and Libya, Egypt because of the growing difficulties of the military regime, Libya because the collapse of the Libyan state is one of the proximate causes of the European migrant crisis as well as creating a terrorist breeding ground. Attempts to rebuild the Libyan state now underway will become more important as 2016 proceeds.

Western reporting of Sub-Saharan Africa is presently dominated by terrorism issues. This ignores two important developments. One is the evolution of the African Union, the second and more important one in the shorter term is economic development within Sub-Saharan Africa. This seems to be proceeding apace, something I expect to continue over 2016.

What about Australia? What can I say?

I think because of time I will leave this to a separate post, setting the domestic economic and political environment within the context set by this post.

Postscript

Just recording two stories for later reference:

• A smuggler's haven in the Sahara
• Image compares Saudi Arabia with Islamic State as execution protests grow