At the moment we are busy staring into our crystal ball, trying to work out if 2012 is going to be a good year, a mediocre year or a bad year. Let's hope that it's not another 2009 or 2010. However, I thought that it might be useful to have a look at a few possible flash points, since being forewarned is akin to being forearmed.
Iran: I've visited five times, and have lots of Iranian contacts and friends: it's a big, populous country with friendly, polite people, great food and awe-inspiring scenery, architecture, culture and history. However, the fly in the ointment is that Iran seems to be determined to build its own nuclear weapons, even though Ayatollah Ali Khamenei issued a fatwa forbidding the production, stockpiling and use of nuclear weapons on August 9, 20051. Allied to its pre-stated aim to obliterate its near-neighbour Israel, this is a potentially tricky situation. (No-one seems to question the right of the US, the UK, France, China and Russia's rights - or not - to own and control nuclear weapons: India, Pakistan, North Korea and possibly Israel2 all took the decision to develop them anyway, on the basis that it is very difficult to stop a sovereign nation doing what it wants to within its own borders, without invading it).
My heart sinks every time I see another report about Iran developing nuclear weapons, since they are always accompanied by suggestions that a 'surgical strike' air bombardment could stop the research. How many times do you suppose you have to bomb a country to dissuade it from possessing a bomb? I only know that the use of such a weapon, after what we saw in Japan in 1945, is unthinkable for any sane nation. It can't be used, but it can be alluded to, like a big stick kept in a cupboard.
Europe: Now that Greece has a new government, the markets have rallied temporarily, but the spectre of an Italian crash has started to be raised. Italy is too big to fail, but too big to be saved. So what happens then? With interest costs of Euro70bn due on its Euro1.8trn government debt, with Euro300bn of debt due to be rolled over in 2012 and with a dwindling number of lenders willing to lend to it, bankruptcy is a real possibility. Possibly following a Greek lead, Italy might also crash out of the Euro and devalue its new/old currency. And after those two, which country would be next? Spain? Ireland? Portugal? Or would Germany decide that it is better off outside the Eurozone, with its own currency again. That's what economists have been forecasting for the last couple of years, but what would that mean for industry? Would Germany's exports soar or collapse? Would industry relocation accelerate to lower-cost, more stable regions (like, er... India? China?)? Would countries outside the Eurozone, but still in the EU (Denmark, UK, Sweden and Poland, for example) be at an advantage or at a disadvantage? If there's an economic collapse in the Eurozone, how does that affect the potential sales for external suppliers like North America and China? So many questions and so very few answers. The problem is that markets move in milliseconds and are solely driven by profit: Politicians often only have re-election on their minds and despite this, seem to move as if stuck in glue.
China: The world's second largest economy after the US, and the world's largest exporter, China is also the world's second largest importer. If growth falters, then imports will drop, reducing export markets for its suppliers. If Europe falters, China's European export markets (worth around Euro282bn each year) will also weaken. Unless China grows its own domestic demand, it will remain a prisoner of its overseas markets.
But that is not the only problem ahead for China: Due to its long-standing one-child policy, it has one of the fastest-aging populations in the world and also one of the lowest population growth rates. By 2050, over half of the population will be over 50: In the 1980s, the average overall population growth was around 1.5%: today it is about 0.6%.3 The population time-bomb is returning to bite China on the backside and there will be an inevitable collapse in economic growth rates as a smaller proportion of the population is economically active. The fact that Chinese inflation is at around 6-7% annually, means that China's cost advantages in manufacturing are gradually being eroded. This is not a problem for 2012, but a collapse of China's bubble economy would be.
I haven't mentioned pandemics, climate change, North versus South Korea, India versus Pakistan or any other potential flash points, but there are enough to keep you awake at night, if you let them. It seems as though 2012 may be another uncomfortable year for us all.
1: http://en.wikipedia.org/wiki/History_of_nuclear_weapons
2: http://en.wikipedia.org/wiki/List_of_states_with_nuclear_weapons
3: http://en.wikipedia.org/wiki/Economy_of_the_People's_Republic_of_China