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What does 2006 have in store?
Doha deal may not be completed, new opportunities and challenges for management, bird flu less likely 'to go human'
Financial Times Writers
1/3/2006
HISTORY shows we do not know what the future brings, Rick Wagoner said in 1998 after restructuring General Motors' North American operations, which he then headed. Now chairman and chief executive of the carmaker that is about to lose its global leadership spot, his refusal to rule out further upheavals now looks wise. Whether GM will teeter into bankruptcy is one of the big questions answered by FT experts in this set of predictions for 2006.
Many of last year's predictions have stood the test of time. Lionel Barber foresaw a less unilateral President George W. Bush and tipped Condoleezza Rice, then not yet confirmed as secretary of state, as a politician to watch. Philip Stephens said Tony Blair, British prime minister, would be reelected, but that speculation would grow about when he will stand down. Philip Coggan saw no slowing in the growth of hedge funds.
Kevin Morrison correctly forecast continuing high commodity prices, but other market soothsayers were less successful. Global stock markets confounded John Plender's forecast by rising over the year - strongly in Japan and Europe. Oil defied David Buchan's prediction by ending the year above $50 a barrel. The Chinese revalued the renminbi by a token amount, to please US critics and prove Martin Wolf wrong.
Iraq had its elections as David Gardner predicted. Roula Khalaf's judgment that progress towards Middle East peace would slow after Gaza withdrawal was correct. And Edward Luce was right to see only détente between India and Pakistan over Kashmir, not a permanent settlement.
David Owen was right to say that London could beat Paris for the 2012 Olympic Games. No one could have forecast that a terrorist attack would befall London less than 24 hours after that triumph. John Willman
Will the US start to withdraw from Iraq?
Yes, but it is unlikely to be a full withdrawal. The reduction in total troop levels -- there are 137,000 troops serving in Iraq on a regular basis -- will follow a gradual transfer of security responsibility to Iraqi armed forces, a process that will accelerate.
American troops are already becoming less visible in main urban areas and their presence will become more discreet in 2006. Remaining forces will play a supporting role to Iraqi troops in most provinces but could still take the lead in the military campaign against insurgents. Roula Khalaf
Will Doha be completed?
Probably not. Even if the trade round succeeds, loose ends will be left until early 2007. But the outcome should be obvious by then, if not well before.
The chances of failure are high. The main problems are caused by a relatively small number of big players. US negotiators insist they cannot win ratification in Congress without substantial improvements in market access for their exporters. Leading developing countries such as Brazil argue similarly. The EU insists it is impossible to go further in agriculture if large developing countries do not make substantial offers elsewhere. Those large developing countries are offering next to nothing in areas of interest to the EU.
It appears that an ambitious package is impossible but necessary, while a modest package is feasible but unacceptable. The odds against success look high. But trade negotiators have escaped tricky situations before. Maybe they will do so again. But maybe they will just postpone reaching a conclusion indefinitely instead. Martin Wolf
Will shares so on rising?
A buoyant world economy, strong corporate profitability and merger and acquisition activity will all support global stock markets in 2006. Despite three years of gains, valuations remain reasonable because profits growth has outstripped the rise in share prices.
But the potential for negative surprises remains - the rate of profits growth will slow, there will be more earnings disappointments than in 2005, and high commodity prices could yet cause a spike in inflation. Stresses in the bond market if interest rates rise more than expected or a big slowdown in US consumer spending could easily knock equities off course, as could a new terrorist outrage or bird flu.
Nonetheless, shares should still end the year higher than they begin it. Christopher Brown-Humes
Will gold stay above $500?
Having taken 18 years to move above $500 a troy ounce, the question is whether gold has staying power. History suggests it does not. But then history has been turned on its head in the gold market recently, suggesting that gold may have entered a new era.
Traditionally gold falls when the dollar gains, and vice versa. But recently the metal has been trading independently of the dollar and has risen to long-term highs against the yen, euro and sterling. With German politicians still haggling over whether they should sell some of the Bundesbank's bullion hoard, doubts remain on whether European central banks will sell all the 500 tonnes allowed under the current gold sale agreement. With those factors in mind, gold is likely to trade between $480 and $550, making occasional ventures above this range. Kevin Morrison
Will there be a big renminbi revaluation?
No. China's currency will be allowed to edge up by perhaps a few per cent against the US dollar. And the peaks may be calibrated to fit the US political cycle if pressure for a revaluation in Washington is ratcheted up again. But otherwise there is no indication Beijing will stray from the path it has set for itself of gradually liberalising the foreign exchange trading regime while at the same time trying to instil in local enterprises the notion of currency risk.
Until the government decides the country and its companies are ready for a more freely floating exchange rate, there will be no sudden, large movements in the renminbi. Richard McGregor
Will the credit cycle turn?
The omens are definitely there: interest rates are rising; companies are building up debt again, sometimes to finance acquisitions; short-term interest rates are either higher than or close to long-term rates; and most predictions see an increase in corporate defaults. On the other hand, companies still have plenty of cash and banks are flush too; and there is no sharp slowdown foreseen in economic growth. Truth is, though, that this state of affairs can last a long time before the cycle actually turns. And new financial technology may be allowing the cycle to continue longer than in the past. Best guess: the cycle to turn late in the coming year or early 2007. Stephen Fidler
Will the London Stock
Exchange stay independent?
Yes. The bid by Macquarie Bank and a consortium of investors is too low to attract support from LSE shareholders. Even if the consortium lifts its bid, many of the objectives that Macquarie says it will achieve -- gearing up the balance sheet, improving efficiency -- can be achieved by the LSE on its own As for alternative bidders, Euronext and Deutsche Börse both face opposition from shareholders and potential competition problems. The New York Stock Exchange would have to convince LSE users, listed companies and shareholders that a takeover would not jeopardise the regulatory attractions of London over New York. Andrew Hill
Will the Democrats take back Congress?
All the stars seem to be aligned for Democrats to recapture the US Congress in the 2006 mid-term elections. As in 1994 when Republicans stormed to power, an unpopular president is reeling from defeat on his domestic initiatives and trying to shore up a party facing growing corruption allegations.
But a polarised country and sophisticated gerrymandering have simply left too few seats up for grabs. To control the Senate, Democrats would need to win every competitive race. And that would be easy compared with the House of Representatives where only some 30 of the 435 seats are genuinely competitive -- in the 2004 election, 98 per cent of incumbents were re-elected.
In 1994, Republicans won 54.6 per cent of the popular vote and picked up 52 seats. If Democrats gain a similar share of the vote this time, they would probably pick up just 10 seats -- well short of the 16 they need to regain control of the House. Edward Alden
Will Japan and China mend their fences?
Probably not. Junichiro Koizumi, the Japanese prime minister who has inflamed Chinese public opinion with repeated visits to the nationalist Yasukuni shrine for the war dead in Tokyo, has said he will step down in September. But his successor -- perhaps Shinzo Abe, the chief cabinet secretary -- could be even more intransigent on this issue. Chinese leaders, meanwhile, have launched a campaign in Asia to isolate Japan diplomatically.
Yet economic ties are stronger than ever and China is now Japan's biggest trading partner. There will eventually have to be a rapprochement -- as there was between France and Germany in post-war Europe -- for the sake of Asian peace and prosperity. Victor Mallet
Will Germany recover?
Yes. After five years of near-stagnation, the German economy is in a strong position to achieve the long-awaited cyclical upturn. Corporate profits are strong, wage pressures are modest, the export boom continues and there are already signs of investment picking up. Towards the end of the year, consumer spending could surge temporarily ahead of 2007's planned 3.0 percentage point rise in value-added tax. The downside risk lies in the oil price and the exchange rate.
But this is going to be a purely cyclical recovery. Germany will still generate less growth at the top of its cycle than the US at the bottom of its cycle. Once the global economy slows down, German economic growth will fall back towards potential growth -- about 1.0 per cent per annum. Wolfgang Münchau
Will Berlusconi win?
Silvio Berlusconi's government is trailing in opinion polls as Italy prepares for April's election. He was hammered in this year's regional and local elections. He has produced nothing like the "economic miracle" he promised voters who swept him to power in 2001.
But Mr Berlusconi is planning last-minute changes to the electoral system that could boost his chances. Romano Prodi's centre-left opposition is certain to score a few own goals during the campaign. And while Mr Berlusconi may be a quirky personality, he is a shrewd judge of the electorate's mood.
Forecast: victory for Mr Prodi -- 40 per cent chance; split parliament, followed by gridlock -- 35 per cent; Berlusconi victory -- 25 per cent. Tony Barber
Will Europe's last dictator be toppled?
No. President Alexander Lukashenko of Belarus is standing for re-election for a further five years in March and, in spite of intense western criticism, is likely to fix the vote and, stay in power. President since 1994, he has suppressed criticism by persistent attacks on the independent media, non-governmental organisations and opposition parties. The feared secret police retains, its Soviet-era name of KGB -- and most of its Soviet-era powers.
The opposition has united behind a single presidential candidate but splits have prevented the launch of a well-coordinated campaign of the kind that led to Ukraine's Orange Revolution. Meanwhile, Russia continues to treat Mr Lukashenko, as an ally, fearing any replacement would look west -- not to Moscow -- for support. Stefan Wagstyl
Will India's government achieve
anything?
The defeat of Laloo Yadav in the Bihar state election has reminded the Congress-led coalition that the Hindu nationalist Bharatiya Janata party and its allies are waiting in the wings. A more unified and cohesive coalition will make modest progress on reform. Foreign direct investment in retailing will be allowed, up to 49 per cent. Privatisation will resume, although not of profitable national champions.
But the government will fail to embark on the sweeping second generation of reforms needed to sustain economic growth at above 8.0 per cent. It will not, for example, meaningfully relax rigid labour laws or improve infrastructure. The Congress leadership, to the frustration of Manmohan Singh, the prime minister, will remain convinced that there are no votes in "neo-liberal" reform. Dynastic considerations will reinforce cautious and consensus-driven policymaking. Sonya Gandhi's 35-year-old son Rahul - grandson of Indira and great-grandson of Pandit Nehru - will take on a top role in the party leadership. Jo Johnson
Will Africa be let down?
Africa is so littered with broken promises that no one will be less surprised than Africans themselves if rich nations fail to live up to the pledges made in 2005. A doubling of aid by 2010 is most unlikely to happen - at least not if you count the money that actually gets through to development projects. Total aid figures have been going up, but mainly because of big debt relief packages. Once these are finished, the figures will not look so good for 2007 or 2008.
As for Africa's side of the bargain -- better and more open government -- no miracles can be expected either. Unlike eastern Europe, there is no lure comparable to the prospect of European Union accession to make African leaders change their ways quickly. David White
Will Googlis shares fall?
One day the facade of invulnerability surrounding the Googleplex in Silicon Valley will shatter and its priced-for-perfection share price will tumble. It has happened to most high-flying technology companies -- including Microsoft -- and it will happen to Google.
It is not hard to think of potential culprits: the peculiar power-sharing arrangement at the top between the chief executive and its two founders; the hubristic arrogance of the company's culture; its heavy reliance on search-based advertising as a source of revenue; its scattering of resources on a hundred different initiatives.
But will this happen in the next year and return its share price closer to the $85 at which Google became a public company in August 2004, from a current level close to its $432 peak? Probably not -- too many forces still work in Google's favour. Above all, there is no sign of the cash being diverted from other forms of advertising and marketing to lead to Google drying up. John Gapper
Will GM go bankrupt?
Rick Wagoner says Chapter 11 bankruptcy does not figure in his strategy for fixing the financial problems at the world's largest carmaker. Barring a catastrophic strike at Delphi, GM's biggest supplier, GM's board is unlikely to over-rule its chairman and chief executive and file for bankruptcy in 2006.
Chapter 11 would allow GM to find a compromise between the claims of investors, workers and pensioners on a dwindling pool of income, and reemerge as a smaller, healthier company. But stakeholders would have to take significant losses, making it unappealing for shareholders or workers.
GM has access to $19bn of cash, is trying to sell part of its finance arm and is about to relaunch its lucrative range of large sports utility vehicles. It is also aiming for annual savings of $7.0bn by the end of 2006. If the savings come through, the cash pile remains large and the SUVs sell well, GM could get itself back into gear. If not, Chapter 11 will loom - but probably not until 2007. James Mackintosh
What is the next fad in management?
There has not been a fully-fledged management fad since the dotcom bubble burst. Granted, there have been recurring themes: execution (a back-to-basics reaction against fad-ism), business ethics (after corporate scandals), leadership (ditto) and offshoring. But none has inspired the lemming-like psychology that led managers to devote themselves en masse to quality circles, business process re-engineering, knowledge management or the internet.
But the twin forces of technological change and globalisation continue to serve up new opportunities and challenges. A second wave of internet-related innovation (think search, podcasting, software as a service) is already building. So is awareness that developing economies are not only sources of cheap labour but also potentially vast markets for consumer goods. Managers will be making many, many more visits to China, India, Brazil and Russia in 2006 seeking fortune "at the bottom of the pyramid". Simon London
Will there be a bird flu pandemic?
Many public health experts are surprised that the infamous H5N1 strain of avian flu has not already caused a human pandemic. Since 1997 it has caused more death and disease in birds than any previous flu virus in history and it has had plenty of opportunity to undergo the mutations required to transmit easily between people.
Indeed, there may be something about the biology and genetics of H5N1 that makes it less likely to "go human" than previous avian flu strains that have caused pandemics -- notably HlNi in 1918. There is no good reason to expect the virus to undergo the fateful transition in 2006. Clive Cookson
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