The World in 2014–Business and Finance


Every year at this time, besides the personal planning I do for the coming year, I relax and read the Economist’s Double Holiday Issue and look through their special report The World in 2014.    I am taking notes on the various articles during the next few days to see what The Economist predicts will be the most significant global events that will take place in the coming year.   The reason why I’m doing this is not just to gain an understanding of these events before they happen, but to preserve a record so that next year at this time, I can look back and see how well the events were (or were not) predicted.

The articles I’ve reviewed in the past few days deal with the geopolitics of the various regions of the world.   The next two articles in the The World in 2014 magazine deal with the state of business and finance in the coming year.

A.  BUSINESS

1.   America’s companies on top once again

Five years after the collapse of Lehman Brothers, the prospects for American business will be pretty good for the following reasons:

  • Demand is steadily recovering
  • Housing market gains strength
  • GM and Chrysler will be profitable again
  • Falling unemployment will boost consumer confidence
  • Natural gas and oil will continue to be cheaper because of fracking (despite increasing regulatory pressure)
  • American business will lead the world into the next phase of social media

On the down side, corporate America will still be obsessed with short-term profits, and the gap between the pay of the boss and the average worker will continue to widen.

2.  Data protectionism

Worries about the American government utilizing data from private firms to spy on Americans will be the impetus for more cloud-computing services in Europe.   A think-tank in Washington has estimated that, in the worst case, the American companies’ share of the cloud-computing market outside the United States may drop from 85% to 55% over the next three years.

3.  Social media grows

The success of Twitter’s IPO will not only lead to Twitter’s acquisition of more businesses, but also the increase of competition between it and other social-media behemoths such as Facebook and Google.   Some had speculated that the social-media land grab had come to an end, but Bob Zukis, author of the book “Social Inc.” thinks that Twitter’s IPO will inspire other social-media outfits such as Pinterest to consider going public.

4.  2014 will be boring

In 2014 there will be a record length of tunnels bored around the world, some 620 miles in all.   Much of this will occur in China, India, the Middle East, and Latin America.   China has revived a plan for building the world’s longest sea tunnel across the Bohai Strait, linking the cities of Dalian and Yantai.

However, Europe will also experience quite a few construction projects, such as the Crossrail, Europe’s largest construction scheme.    Tunnel-boring machines are getting more sophisticated, allowing for the digging of ever-deeper tunnels, including those under the sea like the Channel Tunnel (completed in 1991).

5.  Airline economy class:   quantitative squeezing

Airlines will be trying to squeeze more revenue from economy class seats by offering differential pricing for slightly larger seats, such as exit-row seats or wider aisle seats.   However, few airlines will go the route of Samoa Air, which charge passengers by the kilo!

6.  Legalization of narcotics

The legalization of cannabis has come to the United States in Washington and Colorado.   The next states to propose legalization are Alaska, Arizona and Oregon.   This will cause Mexican drug cartels to abandon the pot business, because of the competition from legal growers in the United States.

Other more ambitious legalization projects are for coca in Bolivia, and synthetic narcotics in New Zealand with such fanciful names as “Apocalypse” and “POW”.

B.   FINANCE

1.   Trade liberalization

There will be three trade agreements in the pipeline in 2014.

  • Trans-Pacific Partnership (TPP):   under negotiation since 2005, involving several large economies including America and Japan; will be concluded in 2014
  • Trans-Atlantic Trade and Investment Partnership (TTIP):  involving America and the European Union; will be negotiated in 2014.
  • Multilateral trade (Doha) deal:    talks resumed in December 2013 in Bali.   Success is not certain, and will be complicated by India’s election.

The issue that affects all three of these deals is American politics.    Fast-track authority, the mechanism by which the president can simply submit the trade deal to the legislature for a simple yes-or-no vote without the possibility of amendment, expired in 2007.    Partisan enmity and the mid-term elections in November 2014 could keep the Congress from renewing fast-track authority, despite a broad array of American business interests that support the trade deals.    Overall, the Economist is more optimistic about the outlook for trade compared to where the world was a few years ago.

2.  Banks retreat

Regulators will keep on pressuring the banks to reform as they have ever since the Great Crash of 2008.   The principle that investment and retail banking should be disentangled has been fairly well established, although the final rules implementing the Dodd-Frank Act in America and the Vickers Commission in Britain have still to be settled.

3.  Euro zone

In response to the euro crisis, policymakers will take the first step towards a banking union, moving the responsibility for supervision of the euro area’s biggest banks from national authorities to the European Central Bank (ECB) in late 2014.    This is only one-half of the banking union, however.

The second step of the banking union, the creation of a single resolution mechanism or SRM that would be responsible for restructuring and, if necessary, propping up failing banks, is meant to be agreed upon in 2014.   Without an SRM, the banking supervisor will have to rely on national budgets to resolve big problems.

4.   Commodities supercycle not quite over

For various reasons, such as the slowing of growth in China, the commodities “supercycle” is running of steam.   However, because of the time lag for the huge, capital-hungry mining projects that started during the boom, new supply is still arriving and more is in the cards.   Prices are close to the bottom of the cycle, and may starts to climb again by the end of the year.

It looks like qualified optimism is in store for 2014!

 

 

 

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