The World Economy in 2015

I am posting in three parts the results of an interview on the year-end outlook.  (The questions come from Chosun Daily, leading Korean newspaper. The interview is to be published there January 1.)

Part 1. The Global Economy in 2015

Q: Around this time next year, which countries do you predict will be the winners, and which will be the losers of the year?

A: The big gainers will be oil-importing economies, particularly China, India and other Asian countries.

Russia will be the big loser. It has now become clear to all how fragile and vulnerable the Russian economy was, especially with respect to world oil prices. It is easy to forget that commentators a few months ago were declaring Russia less vulnerable to Ukraine-related sanctions than Western Europe. Before that, they were judging the $50 billion 2014 winter Olympics in Sochi a triumph.

Q: Even up to last year, Russia was considered a promising market. Which country could be the ‘Next Russia’ in 2015?

A: Cuba. Obama’s decision in December to normalize relations between Washington and Havana is a historic opening. Cuba is a small country, of course, but once it is opened up, the potential for investment and rapid growth is big. Many Republicans in the US Congress will oppose ending the trade embargo; but they are on the wrong side of history and on the wrong side, even, of domestic public opinion.

Q: What key word do you predict will emerge in the global economic scene in the new year? Why?

A: CoP21.  The 21st Conference of Parties of the UN Framework Convention on Climate Change, to be held in Paris in December 2015. The odds of a substantive agreement by countries, rich and poor, to limit their emissions of greenhouse gases are better than they have ever been. The catalyst is the November 2014 breakthrough between Chinese leader Xi Jinping and US President Barack Obama.  That, in turn, was made possible because China’s air pollution has gotten so bad that its government is ready to take serious measures.

Q: What in your opinion is the greatest unforeseen risk to world economy going into 2015?

A: By now, possibilities such as plunges in asset prices or a return of the euro crisis are sufficiently prominent in market awareness that they are not unforeseeable risks or unknown unknowns. Rather they are the known tail of the probability distribution.   I suspect that some of the true black swans come from such areas as technology, the weather, and health.   An example would be a disease that is more contagious than the ones we have seen. Or cyber warfare. Or WMD terrorism. I think of black swans as risks that are supposedly unknowable but in fact should be on the list of possibilities if one takes a broad enough perspective. Of course the risk of any single such disaster happening in any given year is small.

Q: According to the IMF, China has replaced the U.S. as the largest economy (in PPP) this year. Despite that, the Chinese government declared a ‘new normal’ and hinted at slowing down. What is your assessment of the Chinese economy in 2015? Will China eventually replace the U.S. as the superpower in the near future?

A: China has accomplished an economic miracle in raising the standard of living of most of its people over the last three decades and the new PPP measures from the International Comparison Project are indeed the best reflection of this.   However China still has a long way to go. For one thing, if the question is income per capita, then China is still a poor country, even in the ICP rankings. For another thing, if the question is the overall size of the economy, then in my view China’s GDP should be compared to the US economy by means of current exchange rates, not by the PPP measure. The reason is that what matters is how much a yuan buys on world markets, not how much it buys in the interior of China. At current exchange rates, US GDP is still about 80% greater than Chinese GDP.   China is likely to catch up, not this decade, but in the next decade..