The World in 2019: A Year on the Edge

Introduction

Many of the forces that will shape the world in 2019 shaped the world in prior years. What
makes this year different is that those forces now lead to one inescapable conclusion: One era
is ending and another will soon begin.

The coming year, then, can best be described as a year on the edge – a transition between the
post-Cold War era and a new era that has yet to be defined. It is the kind of year that will seem
remarkable only in hindsight, a moment in time when pent-up forces and countless events take
us past the point of no return. It will be a year of anxiety, suspicion and fear of what the future
holds as countries seek to delay the onset of crises they cannot avoid.

A Cycle Ends

The global economy is off balance. Production is in danger of outpacing demand, threatening
the many countries that have staked their economic well-being on production.

We’ve been here before. In 2016, global GDP increased by 2.3 percent as global trade grew by
only 1.8 percent. China’s stock market collapsed that year. Italy was sitting on a mountain of
nonperforming loans. Oil prices were low.
But in 2017, the economy rallied. Trade grew by 4.7 percent and global GDP grew by 3 percent.
Commodity prices also bounced back. Stimulus continued to flow in China. A new U.S.
government passed tax cuts that drove up corporate profits and economic growth.

The euphoric turn in the business cycle, however, did nothing to halt the growth in wealth
inequality throughout much of the world. Stimulus only aggravated the underlying problems.

More signs appeared in 2018 that something was amiss in the global economy, none more
important than the U.S.-China trade war. That economic relationship has helped drive global
trade for years. The U.S. is the world’s top importer and China the top exporter, and both
generally benefited from the arrangement.

But now, Washington wants China to open its market to U.S. goods and services in exchange for
continued and reliable access to U.S. markets. China, though, wants to ease its dependence on
foreign goods, not reinforce it. The problem is that Washington is asking Beijing to do
something it can’t without significantly weakening its economy.
The emerging geopolitical rivalry between the world’s two largest economies is a result of and a
threat to the global economy, and its effects will be felt far and wide.

The Forecasts

The U.S. and China will reach a deal on trade, but it won’t end the trade war.

China and the U.S. have an interest in allaying everyone’s economic concerns and in claiming
victory against each other, but in 2019 it will become clear that they have embarked on a long
process of economic decoupling. It will be much more difficult for China to disengage from the
U.S., given its dependence on the U.S. consumer market and investment from U.S. firms. But
Washington has made the risks of failing to do so clear to Beijing. China cannot give in to U.S.
demands without abandoning its core state-led industrial model and its pursuit of sustainable
growth based on high-tech exports.
U.S. economic growth will slow. The U.S. is approaching the end of its current expansionary
cycle, and a recession before the year’s end would not surprise us.

The U.S. is at the end of one of the longest periods of economic growth in its history. The stock
market is up. Unemployment is low. Interest rates are rising. Energy prices are falling. Yet this
period of growth hasn’t been all positive. It has widened wealth inequalities, which are now at
levels similar to those of the Great Depression. Real average hourly earnings were stagnant in
2018 despite impressive top-line growth figures. Rising interest rates are making borrowing
more expensive. Tax cuts and trade policy changes introduced by the Trump administration to
encourage domestic production and GDP growth aren’t enough to solve the problems
underlying the disparity. Using these tools at the end of a growth cycle, moreover, will weaken
their effect in the next downturn.

And the U.S. is, in fact, overdue for a recession. The Federal Reserve has issued a warning about
historically high levels of corporate debt and the deteriorating quality of assets linked to
nonfinancial business debt. Capital has been cheap for the past decade, and we have long
maintained that the economic recovery since the 2008 financial crisis has been lackluster. The
risk that a renewed economic crisis will either spark or accompany a U.S. recession can’t be
overlooked.
The Race for Power in the Periphery

Since the Soviet Union collapsed in 1991, the U.S. has been the undisputed global superpower.
While there are certainly other hubs of significant military and economic power in the world,
none is equal to the U.S. – nor is the gap particularly close. The U.S. spends more than the next
10 countries combined on its military forces and represents nearly a third of the global
economy.

Still, the United States isn’t omnipotent. Its power, like all power, has limits, and the scope of
U.S. foreign policy has begun to outstrip even the tremendous resources of the United States.
Other countries are catching up to the U.S., however slowly. If you want to see evidence that
the gap is closing, look no further than the race for power in the periphery – places such as
Eastern Europe, the South Pacific, South and Central America, Central Asia, and the Korean
Peninsula that don’t fit neatly into any one sphere of influence. In all these regions, the U.S. is
courting new allies and using economic incentives and limited military deployments to solidify
its position. Call it a reanimation of great power competition.

The Forecasts

North Korea will not give up its nuclear weapons or substantially dismantle its missile program,
but neither will it resume testing intercontinental ballistic missiles. The U.S. will adopt a policy of
containment toward North Korea, and U.S.-South Korea interests will further diverge over
unification.

There will not be a war over North Korea in 2019. The standoff over the country’s nuclear
program has eased because of an implicit “freeze for freeze” agreement between Pyongyang
and Washington, but North Korea will not denuclearize or meaningfully reduce its missile
program. It will, however, make modest concessions and stop short of crossing U.S. red lines.
The United States, in turn, will quietly shift to a strategy of containment. The underlying drivers
of the standoff will remain unresolved. As a result, South Korea and Japan will continue to
question the reliability of U.S. security guarantees and so will begin to chart their own course.
For South Korea, that means (very gradual) reunification with the North. For Japan, that means
(very gradual) remilitarization.

The U.S. and the Taliban will reach a deal in Afghanistan. By the end of the year, the U.S. will
announce a schedule for withdrawing the bulk of its remaining forces from the country.

The United States is currently in direct negotiations with the Taliban, and at least one U.S.
official has said Washington hopes to reach an agreement by late April, when Afghanistan is
scheduled to hold its presidential election. Reaching a deal would benefit both sides, and all
indicators suggest they’ll do so by the end of 2019. Afghanistan is a massive drain on resources
that the U.S. needs to reallocate elsewhere. Rival powers, however, will try to keep the U.S.
engaged there by encouraging the Taliban, who are trying to keep the gains they fought so hard
for, to make the deal unpalatable to Washington.
European Disunion

The European Union can’t survive in its current form. It’s not that the European Union no
longer has a purpose; it’s that the purpose has changed, at least in the eyes of the bloc’s
leaders, France and Germany. For them, the only hope for retaining global relevance is through
European unity. But what undermines the EU more than anything else today is that it means
different things to different members. For most member states, it’s about free trade,
development funding and investment (and some rules they’d rather ignore). For France and
Germany, it’s about amplifying their own strength.

In the long term, the EU will experience more and more infighting, and its rules and regulations
will become almost meaningless. France and Germany will do everything in their power to keep
the EU together. The problem is that other member states are already chafing under the
interventions from Brussels, which is embroiled in disputes with Italy, Hungary and Poland
while raking the United Kingdom over the coals over Brexit – a move that could prove very
costly for the EU if the U.K. leaves the bloc without a deal. For all these reasons, the
confrontation between nationalists and internationalists will present new and dangerous
challenges for the European project in 2019.

The Forecasts

The European Union and Italy will avoid a major confrontation in 2019. The underlying problems
– namely, Italy’s debt-laden economy and political fractiousness – combined with Brussels’ need
to assert its authority will make their peace temporary, though it will last the year.

Despite the recent announcement of a deal with the European Commission on the budget, Italy
will be the most dangerous challenge facing the European Union in 2019. Markets responded
exuberantly to the news of an agreement on the budget. But markets are fickle and forgetful.
Just because it did some fancy arithmetic to satisfy Brussels this year doesn’t mean Italy’s high
levels of debt and the problems generated by chronically slow growth are going anywhere. The
EU survived a dire debt crisis in Greece, but it has yet to fully recover, and it hasn’t completed
reforms that would help it survive another one. Italy’s economy is almost 10 times the size of
Greece’s, so the EU bureaucracy must be more delicate in bringing Italy to heel than it was with
Athens. Make no mistake, though: A similar issue is brewing between the two sides. As the
global economy weakens and the Italian government struggles to deliver on its promises, the
fragile truce between Italy and the EU will come under considerable pressure.

While we expect the agreement to endure, euroskepticism in Italy will not disappear, and the
EU’s hard line and double standard in dealing with as central a member as Italy will reverberate
throughout the bloc.

The U.K. will leave the EU with an agreement in place. The compromises the British government
will make to do so will divide the United Kingdom.
The British government has come under intense scrutiny over the deal it reached with Brussels
in November, but no alternative plan has emerged. Despite the political drama that has
surrounded the talks, we still believe that maintaining a coherent and productive trade
relationship is in the interests of both sides.

Two key questions will remain: What will be the U.K.’s future relationship with the EU, and
what will be the future of the U.K. itself?

The United Kingdom maintains a close security relationship with several European states. It’s
also an important trade partner for major EU economies such as Germany and the Netherlands.
Deal or no deal, those relationships will continue, and the U.K. will be an important ally for EU
states on the periphery seeking to balance against Germany and France.

Its future is a different story. Much will depend on the deal, but the same forces that compelled
the United Kingdom to leave the bloc threaten its unity, too. If a Brexit deal ends up
disproportionately hurting Scotland, for example, it could create renewed calls for Scottish
independence. Northern Ireland is also in an unstable position. The sectarian issues that led to
the Troubles are still simmering, the peace held together by the 1998 Good Friday Agreement is
fragile, and the economy is under significant pressure.

In the end, Brexit will have two lasting effects. First, it will hamper the EU’s drive for global
relevance by depriving it of a leading European power. Second, it will demonstrate how
powerful the bloc still is relative to any single member.

Iran’s Enemies Strike Back

The center of gravity in the Middle East in 2016 and 2017 was the rise and fall of the Islamic
State. In 2018, it was Iran’s attempt to fill the power vacuum left by the jihadist group’s demise.
A coalition then formed to push Iran back. In 2019, then, the center of gravity will be the
coalition’s efforts to that end. The country best positioned to profit from this development is
Turkey.
Iran’s precarious situation, Israel’s deteriorating security environment, Saudi Arabia’s delicate
power base and the United States’ push for regime change in Iran all lead to one inescapable
outcome: a relatively stronger Turkey. By undercutting one would-be regional hegemon, the
U.S. is effectively gift-wrapping that status for another.

The Forecasts

Iran’s position in Syria will weaken.

Now that the Assad government has secured control of most of Syria, it will stop focusing so
much on fighting insurgents so that it can try to rebuild its war-torn country. Iran was an
important ally for the government, providing foot soldiers for ground combat, but what Syria
needs now is reconstruction funding, and plenty of it. Iran is in no position to provide that
capital. The U.S. has isolated it economically. Iranians are losing spending power and facing
food rationing, problems made worse by a nationwide drought. Similarly, Russia, the Syrian
government’s other main backer, may no longer be the benefactor it once was. It did not prop
Assad up so that he could become an Iranian puppet. Moscow wants a legitimate
counterweight to Turkey, and that means ensuring the Assad government is strong enough to
stand on its own. The country best suited to meet Syria’s immediate needs is Saudi Arabia,
which, unlike Iran, is still a part of the global trading system and sits on some $500 billion in
foreign reserves.

Israel will attack Hezbollah in Lebanon.

Hezbollah has crossed Israel’s red line. It is acquiring advanced precision-guided munitions from
Iran and, according to Israel, manufacturing them inside Lebanon. These weapons acquisitions
pose a greater threat than Israel will tolerate. Its position is that it must pre-empt potential
threats, and it is already outlining its justification for attacking Hezbollah. Hezbollah, moreover,
is weaker from its time spent fighting in the Syrian civil war; Israel knows it will not have a
better opportunity to neutralize the group than it does now.
Its last war against Hezbollah did not go well, though, so Israel will try to limit the scope of any
conflict. Its primary goal will be to deter Hezbollah. The most likely scenario, then, will be an air
campaign designed to cut off supply routes between Iran and Hezbollah through Syria and to
destroy factories and storage sites for guided munitions. Israel will focus on weakening Iran
through operations in Syria, but to curb the Hezbollah threat, it will eventually have to target
the group in Lebanon. At that point, things could escalate quickly.

Note: This report is a summary of a longer 2019 Geopolitical Futures forecast published last
month. You can get the full report - and a years’ worth of other great info – by subscribing.
Click here for a special offer.

© 2019 Geopolitical Futures, LLC. Republished with permission from Geopolitical Futures.