2008 predictions: the FT

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President Clinton, Google grows, $100 oil, but no US recession – this is 2008

Published: December 30 2007 17:48 | Last updated: December 30 2007 17:48

The FT’s crack corps of pundits had great success in predicting the events of 2007. Once again,

therefore, we have urged them to throw caution to the wind and risk humiliation in the pursuit

of glory.

Last time, Edward Luce foresaw Barack Obama’s political trajectory with near-clairvoyant

accuracy, beaten only by Christopher Brown-Humes, who called the turn in the credit cycle.

Give that man a $1m bonus. John Thornhill predicted Nicolas Sarkozy’s victory in France’s

presidential race and David Gardner said there would be no US attack on Iran.

Less successful was a prediction that the dollar would remain strong, but the worst prediction

of 2007 was fortun­ately cut at the last minute. I had confidently forecast a New Zealand victory

over France in last October’s Rugby World Cup. Robin Harding

Will the credit crunch continue?

Yes. The good news is that banks and policymakers are now taking the necessary action.

But even if the problems remain limited to subprime mortgage debt – and that is a big “if” –

it will take several more months for losses to work through the system. After all, these

subprime losses are extremely large, running at $200bn or more. And as they hit the balance

sheets of banks, financial institutions will face pressure to cut lending in 2008.

But the really big uncertainty is whether further contagion will occur. Defaults are now

emerging on other classes of mortgage, as well as credit card and commercial property debt,

and this could create another $200bn of losses. The nightmare scenario, however, is one in

which risky companies start to default on their loans. Thankfully, there is no sign of this

occurring yet. But if the US economy goes into recession, the chance of corporate defaults

will rise – which could produce more losses for banks, and thus a second chapter in the credit

crunch story. Gillian Tett

. . . causing a bear market in equities?

Stock markets may well fall in 2008 from their levels at the end of this year, but they would

need to drop 20 per cent from their recent peaks for there to be a full-blown bear market.

The first half of the year will be challenging, as equities continue to be hit by credit market

ructions, fears of recession in the US and UK and downward revisions to earnings forecasts.

But there are positives, too: the prospect of lower interest rates in the US and UK, mergers

and acquisitions act­ivity supported by strong corporate balance sheets, and further moves by

sovereign wealth funds to bail out banks and companies in distress. Equity valuations, relative

to bonds, should also be supportive. These factors should be enough to allow equities to weather

the credit gloom – and they may even make modest gains over the year as a whole.

Christopher Brown-Humes

Will Citigroup break itself up?

No. Vikram Pandit, Citigroup’s new chief executive, may be tempted to split up the bank assembled

by Sandy Weill. Citigroup’s problems in 2007, which led to the departure of Chuck Prince, have

raised questions as to whether it is simply too big to manage.

Mr Pandit is an investment banker by training, as is Sir Win Bischoff, Citi’s chairman. Both of them

know they might be able to drive up Citi’s shares in the short term by spinning off its investment

bank. But there are obstacles: it would have to raise more capital, and tax would be an issue. As

important, Mr Pandit will realise that, if Citi did not exist, someone would be trying to invent it:

financial companies are consolidating. Citi’s problem is not that it exists but that it does not work

well enough. John Gapper

Will Hillary Clinton be the next US president?

Most likely, yes. Barring a remarkable upset, the Democratic nominee will win the election, so

great is the unpopularity of this administration – and Mrs Clinton will be the nominee.

Barack Obama’s surge in Iowa and New Hampshire shows voters grow to like him more the better

they know him. Americans want a change, and he is fresh. Also, there are signs of Clinton fatigue.

For all her talents, the former First Lady is not new – and leaning on her husband’s popularity

whenever her campaign misfires underlines the fact.

Even so, Mrs Clinton’s grip on the nom­ination is tighter than the Obama bounce suggests. If the

nomination contest were fought primary by primary Mr Obama might be favourite to win – but it is

not. In February the elections arrive in a rush, and the candidates are spread thin. Mrs Clinton will

not give up if she loses the first two votes: her drive and ambition forbid it. Her lead among

Democrats is big and well-entrenched. Overturning it is likely to be beyond even Mr Obama.

Clive Crook

Will Pervez Musharraf stay in charge?

The murder of Benazir Bhutto underlines the savage unpredictability of Pakistani politics. Pervez

Musharraf’s chances of seeing out 2008 as president may be enhanced if the murder of Ms Bhutto

is laid at the door of jihadists or al-Qaeda. This would allow him to argue plausibly that Pakistani

demo­cracy – and indeed the Pakistani state – are threatened by Islamist terrorism, and might serve

as a justification for a further period of emergency rule.

However, the president’s position is probably now more insecure. Whatever the real truth,

Mr Musharraf’s supporters in the US and in the Pakistani military may conclude that he is too

tainted and divisive a figure to merit further support. A period of increased instability is now

inevitable. There is a better than even chance that Mr Musharraf will not be president by the end

of the year. Gideon Rachman

And what about Vladimir Putin?

Mr Putin has chosen Dmitry Medvedev, his close associate and deputy prime minister, as his

candidate for the March presidential election. Given Mr Putin’s personal popularity and the

Kremlin’s backing, Mr Medvedev will win by a mile. He will then make Mr Putin his prime minister.

At this point, parliament, dominated by Mr Putin’s United Russia party, may well vote to change

the constitution to transfer power from the president to the prime minister. But even if it does

not, real power will remain in Mr Putin’s hands as he is the focus of almost all his administration’s

public popularity. However, he is not in a position to become a dictator: power is divided among

competing groups of senior Kremlin officials, who owe their allegiance to the president but not

their absolute loyalty. Stefan Wagstyl

Will Iran get the bomb?

Luckily, not this year. Even the US, usually the most pessimistic about ­Iranian intentions, now judges

that Iran could produce enough material for a nuclear weapon in 2009 at the earliest, but more

likely between 2010 and 2015. In an extraordinary about-turn, the US’s National Intelligence

Assessment now tells us Iran also stopped its atomic weapons programme in 2003.

That is not to say Iran will not continue in its declared pursuit of a fuel cycle, the most sensitive

part of which is enriching uranium. Mastering the process, which it is close to achieving and

apparently determined to continue, will eventually give it the option to produce atomic weapons.

For now, though, a bomb is not on the cards, nor are the capabilities to produce it quite there.

Roula Khalaf

Will Iraq disintegrate?

Iraq is a broken country – broken by dictatorship, war, invasion and occupation. For most practical

purposes it already has disintegrated: it can no longer properly be considered a unitary state.

The best hope is a weak central government whose primary role is to allocate oil revenue on an

agreed basis.

That would require a broader rapprochement in the region between Shia Iran and Sunni Saudi

Arabia (which is possible), and the US to bury the past and seek a diplomatic grand bargain with

Tehran (which is not – at least in this last year of the Bush administration). David Gardner

Will Nicolas Sarkozy blow up?

Observing Nicolas Sarkozy governing France is a bit like watching a man striking matches in a

warehouse full of fireworks: there is constant colour, noise and excitement but also a nagging fear

that the whole thing might explode. His determination to reform the country’s rigid labour laws

is the most likely spark. But the country’s civil service, universities and banlieues are also

combustible. The French president’s impulsive foreign policy seems yet another accident foretold.

That said, Mr Sarkozy has an instinctive understanding of his compatriots and a happy knack of

skirting disaster. French voters elected him to change the country. He runs the most risks by

taking none. There will be plenty of flashes in 2008, but none is likely to prove fatal. John Thornhill

Progress on a Kyoto replacement?

There will be real progress on climate change in 2008, but it will often feel as if the world is taking a few

steps back for every stride forward. Although the US agreed at last in Bali to launch negotiations, with

a view to wrapping up a Kyoto replacement by the end of 2009, the ink was scarcely dry before the

Bush administration started voicing “serious concerns” about the role of developing nations in future talks.

That will be the pattern of negotiations this year, as officials fill in the details of the Bali “roadmap”.

Progress will be accompanied by recriminations, from the US and the European Union, and from

developing countries fearful of being landed with a bill for rich countries’ emissions. Fiona Harvey

Will oil break $100?

Yes. $100 has been a glass ceiling for the oil price, approached a couple of times but not yet broken.

Yet with such a volatile market, and Opec apparently prepared to defend a level of $90, it is hard to

see that ceiling remaining intact all year. As 2008 wears on, though, a weakening global economy will

have an effect on oil demand, even in China, which has been the biggest source of demand growth.

Oil is likely to end the year lower than it began it. Ed Crooks

Will there be a US recession?

The US will skate along the brink of recession in early 2008, but should avoid tipping over the brink,

in part owing to continued strong exports to the rest of the world. Nonetheless, the economy will not

bounce back quickly and will instead endure a protracted period of weak growth, during which time it

will be vulnerable to any further economic shocks.

House prices will continue to fall nationwide, with big declines in California and Florida. However, the

negative wealth effect on consumers will be partly offset by adequate earnings growth in a resilient

jobs market. Unemployment will edge up, but not by much. The Federal Reserve may end up cutting

interest rates by more than it thought it would, but its ability to do so will be constrained by inflation

risk, especially if oil and food prices remain high or move higher. Krishna Guha

Will UK house prices fall?

Yes, house prices will be lower at the end of 2008 than at the start and here are five reasons why.

First, house prices are extremely high on almost any measure you can think of. Second, lenders

are already tightening credit conditions so getting a mortgage will become more difficult. Third,

house prices are already falling gently in more than half the UK. Fourth, the economy will slow.

And fifth, mortgage lenders are predicting no change in house prices over 2008, which is about as

close as anyone with such a vested interest could ever come to predicting a drop.

But if you are itching for a house price crash, I don’t think 2008 will be your year. House prices

tend to fall slowly and the economy does not yet look sickly enough for anything more dramatic

than a gentle glide down to still very high house prices. Chris Giles

What about eurozone interest rates?

They will fall – but it is a close call. The European Central Bank ends the year in a hawkish mood.

Inflation is way above its comfort zone and the data suggest that eurozone growth remains robust.

If that continues, the ECB could still raise official borrowing costs next year. Equally, the ECB

would be quite happy to do nothing for an extended period, leaving its main rate unchanged at

4 per cent.

But inflation should fall in 2008 and the ECB may prove over-optimistic about growth. A weaker

US economy as well as the higher financing costs caused by the credit squeeze will only have a

braking effect. Another surge in the euro would further curb the ECB’s hawkishness, and who

knows what else lurks ahead? As inflationary pressures ease gradually, the ECB will move

towards cutting rates. Ralph Atkins

Will China revalue the renminbi?

No. The Chinese authorities will continue to permit measured appreciation of their currency

against the US dollar, but will not allow the big one-off upward adjustment that the country’s

trade partners call for.

Faster appreciation against the dollar is unlikely in 2008, despite growing pressure from abroad

and another jump in China’s foreign currency reserves, perhaps to about $2,000bn. The

government treasures the fast growth a cheap currency brings and believes it is able to manage

the inflationary consequences. Ultimately, China will have to allow faster appreciation. But only

a big jump in the rate of inflation would force the government’s hand in 2008. Martin Wolf

Will Cameron replace Brown?

Not yet. After the autumn election-that-never-was Gordon Brown will hang on until at least 2009

and possibly mid-2010 before daring to face the voters. The premiership was Mr Brown’s lifetime

ambition. Now he has got there he seems not at all certain what he wants to do.

So David Cameron has the chance in 2008 to make the political weather – to turn himself from

a deft and likeable opposition leader into a credible prime minister-in-waiting. Yet, for all the buzz

around the Tory leader, he has one big problem. The country may have warmed to his rebranded

Conservatism, but many in his own party still prefer the cold political steel of Thatcherism to

Mr Cameron’s cuddly alternative. Satisfying both constituencies demands an awkward balancing

act. Philip Stephens

Will Boris beat Ken?

Ken Livingstone’s success as first London mayor has confounded his many political opponents.

He has been prepared to introduce unpopular but necessary measures such as the congestion

charge, while forging alliances to win the 2012 Olympic Games for London. Boris Johnson,

by contrast, has very little by way of achievement to offer the capital’s voters, apart from the

series of gaffes that have brought him to the attention of the wider world.

Mr Livingstone may yet crash and burn, though he has shown a remarkable ability to tough out

sustained media attacks. My prediction is that voters will recognise his record, reject Boris’s

clowning and re-elect Ken for a third term. John Willman

Goodbye to corporate social ­respons­ibility?

Never mind rising sea levels: the waves of cynicism washing over corporate executives as they

push their CSR agendas promise to become life-threatening in 2008. In the inevitable life cycle

of management fads CSR is now heading for the exit. Customers are generally unconvinced

by the hype. And “social responsibility” was always too flimsy a concept to gain serious traction

with business leaders.

That gives us a clue as to the identity of the next Big Thing in management: sustainability.

Unlike CSR, this concept has some meat and commercial potential to it. Innovations that make

money while helping to reduce carbon emissions are actually worth pursuing. So here’s one

further prediction for next year: the urgent rebranding to be carried out by all those CSR

consultancies, which will be replacing the old acronym with the more contemporary “sustainability”

label. Stefan Stern

What will Google do next?

The Google juggernaut will gather even more momentum, pushing its share of the search business

up to 75 per cent worldwide, its revenues to $18bn and its stock price past $1,000. Now it has seen

off Microsoft and Yahoo and proved it can grow exponentially without missing a beat, a severe

econ­omic downturn remains the main threat.

By the end of the year Google’s massive, and spreading, influence should start to force a

realignment of the online landscape. The first result: a merger dance between Microsoft, Yahoo,

AOL and Ebay, as the rival search, advertising and e-commerce companies adjust to deal with the

new reality. But Google’s Achilles heel will also be revealed this year as official concerns over online

privacy reach new heights, with European regulators leading the way. Richard Waters

The best Olympics ever in Beijing?

Given China’s vast investment of political and fiscal capital, they had better be. Much of Beijing has

been rebuilt in the past decade. Venues such as the “Bird’s Nest” stadium and “Water Cube” pool

are stunning architectural feats. Popular enthusiasm and 7m cheap tickets mean the Games will also

be the best-attended. Even competitors in minority sports such as rowing will bask in the attention of

large crowds.

But the worry for organisers is the sheer level of expectations for an event billed as a coming-out

party for the world’s most populous nation. Being merely the “best yet” will not be enough: anything

less than perfection will disappoint. Mure Dickie

The Financial Times