Three months isn’t that long a time, geopolitically speaking. Certainly it’s not long enough to validate or invalidate our 2019 forecasts. Nations tend to take a while to change their behavior and, when they do alter their behavior, they tend to take a while to execute the changes. So while there isn’t enough available data to be conclusive, much of the data we do have bodes well for our forecast, two of which are worth noting here. First, we said the United States was going to become much more engaged in the affairs of South America, and though we didn’t specify that that engagement would be the promotion of regime change in Venezuela, that is exactly the sort of thing we expected. Second, we said the Taliban and the U.S. would come to a negotiated settlement, and toward that end ample progress has been made. It may be that the U.S. doesn’t withdraw entirely from Afghanistan by the end of the year as we forecast, but the momentum for withdrawal has increased significantly, and through one quarter of the year, this particular forecast appears to be on track.
It’s not all good news, of course. Several of our other forecasts are inconclusive so far. Brexit is a particularly glaring example – we believed that the United Kingdom would leave the European Union with a deal in place this year. We still believe that that is the case, the melodrama of British politics notwithstanding, because neither the EU nor the U.K. has an interest in forfeiting a deal. (But even for a level-headed group such as GPF, it’s becoming more difficult to ignore Britain’s internal political chaos.)
We would also call our readers’ attention to the Middle East, where we expected Israel to take pre-emptive action against Hezbollah and Turkey to shore up its military presence inside of Syria. Israel has been preoccupied, though, by the upcoming election and restlessness in the Gaza Strip. The song’s the same for Turkey, which just held its own elections and is trying its best to adjust to Washington’s “Syria policy,” if it can even be called that.
Overall, the first quarter of 2019 has mostly comported with our expectations, but we invite you to look at our forecast-by-forecast analysis below for more details.
A Cycle Ends
The U.S. and China will reach a deal on trade, but it won’t end the trade war.
There have been several signs over the past three months that trade talks are progressing. In February, the U.S. announced it would delay a sharp increase in tariffs scheduled for March 1. A draft agreement is reportedly in the works, and both sides seem cautiously optimistic. There’s even been talk of a “signing summit” between U.S. President Donald Trump and Chinese President Xi Jinping by early summer. Beijing already appears to be preparing the Chinese public for concessions it will most likely have to make to get a deal signed. The devil, of course, will be in the details, and major sticking points – particularly involving enforcement – evidently still remain. Tariffs aren’t the biggest problem plaguing the Chinese economy, but China is nonetheless craving whatever relief lifting them would bring. For the U.S., the tariffs’ diminishing returns are starting to become clear as both U.S. duties and Chinese retaliatory measures begin to take a toll on the U.S. economy. There’s little evidence that China is willing to make the sweeping structural changes needed to truly alter the bilateral trade relationship – and even if it were, such reforms could take years to implement and would be exceedingly difficult to verify. The U.S. is likely to insist on phasing out the tariffs, which means Washington and Beijing will be negotiating what counts as progress indefinitely. Meanwhile, there’s little to suggest the parallel “tech war” – the more strategically important of the two areas of dispute – is going away anytime soon.
A decline in living standards will lead to social unrest in Russia. It won’t be enough to effect regime change.
So far in 2019, we have not seen a major rise in social unrest related to deteriorating living standards, though there have been some protests in the regions around Moscow related to the capital’s waste disposal plans. We nonetheless believe this forecast is on track because social unrest is often preceded by things like consumer price increases, tax hikes and stagnant incomes – all of which are already present in Russia – and it takes some time for the population to feel the negative effects of these changes on their daily lives.
There are some indications, however, that Russians are becoming increasingly frustrated with their economic situation. There’s a widespread expectation that prices for food staples like bread and milk will increase. And poverty is being widely discussed as a social problem, though it’s a problem that will become increasingly difficult to track as Russia’s official statistics agency, Rosstat, announced this month that it will stop releasing details on real incomes.
The results of various surveys have also shown rising distrust in authorities. According to the Public Opinion Research Center, President Vladimir Putin’s trust rating has fallen to 33.4 percent, a 13-year low. And in polls conducted by the Levada Center, one in five Russians said they were willing to participate in protests on economic matters and more than half of Russians said they would support the resignation of the government. The polling agency also found that the authority of the Federal Security Service and the Kremlin has declined since 2017. Therefore, even though we haven’t seen public frustrations manifest in large-scale protests yet, the underlying conditions that could lead to unrest are present.
To manage the fallout of the trade war, China will intensify its suppression of internal dissent and employ modest fiscal stimulus to sustain growth.
By the end of the first quarter, this forecast has already proved accurate. China has undertaken substantial stimulus initiatives to combat slower growth. It has approved infrastructure spending (including $125 billion on railroad projects), tax and fee cuts for small businesses, and subsidies for consumers to purchase small trucks and passenger cars in rural areas. Beijing has also decided to increase its budget deficit to allow for more stimulus and to introduce new regulatory institutions to oversee the expansion. But China’s efforts to spur growth have gone beyond stimulus spending. The People’s Bank of China is injecting more liquidity into the financial sector by, for example, decreasing the reserve rate requirement. Total social financing (a broad measure of lending in China) hit a record high in January as Beijing tries to get more financing into the hands of credit-starved small and midsized companies.
Meanwhile, Beijing is continuing to suppress opposition by hunting and capturing “tigers,” including most recently the former Interpol president. There have been some notable examples of backlash from both the financial and political elite in China. In January, it was reported that four wealthy Chinese business magnates transferred $17 billion to trusts to try to avoid Beijing’s new tax rules. And at an annual meeting of the country’s political elite known as the “two sessions,” grumbling about the government’s economic performance appeared more prevalent than in past years. But so far, the government has taken a softer approach than one might expect – it’s hard to say whether this is a result of confidence in its ability to handle a real backlash or nervousness about triggering one. But concerns over Beijing’s monitoring activities continue; in early January, the University of California even warned students to avoid using certain messaging apps while in China.
Economic growth in much of the European Union will slow, and some countries’ economies will contract. Germany is especially vulnerable to a recession.
Germany started the year skimming along the surface of technical recession. Its economy shrank by 0.2 percent in the third quarter of 2018 and was flat in the fourth. The Munich-based Ifo Institute is forecasting 0.2 percent growth in the first three months of 2019, and annual growth forecasts seem to be adjusted downward weekly. Italy fared even worse and is in recession. The European Central Bank has projected growth of just 1.1 percent in the eurozone, after preliminary growth of 1.9 percent in 2018, and has noted that “recent sentiment indicators have broadly worsened.” Global uncertainty – particularly related to Brexit and the U.S.-China trade war, not to mention the risk that the U.S. will set its sights on its trade deficit with Europe later this year – will continue to dampen trade and, thus, European growth.
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.
It’s a little early to make any definitive statements about this forecast, as we won’t have first-quarter growth data for another few months. Still, there are a number of indicators that suggest this forecast is well on track. Last week, the U.S. revised figures on 2018 fourth quarter growth from 2.6 percent to 2.2 percent, which notably was 0.2 points below Reuters’ forecast. Two weeks ago, the three-month and 10-year yield curve inverted briefly, which, though not a definite indication of recession, signals short-term economic weakness. In addition, U.S. home sales dropped in December and January, although they recovered in February. Meanwhile, both government and consumer debt continue to climb, with the national debt reaching $22 trillion and consumer debt passing $4 trillion. The exact timing of the next recession remains uncertain, but it’s clear that U.S. economic growth is slowing.
The Race for Power in the Periphery
Ukraine and Belarus are the two places with the potential for a U.S.-Russia confrontation. Ukraine is at risk of falling apart. Russian influence in Belarus will threaten Poland.
Though Russia remains Belarus’ closest ally, Minsk continues to seek closer ties to the West, fearing Moscow may one day lose the ability to financially support its neighbor. In January, Belarusian President Alexander Lukashenko said Moscow could lose Belarus as an ally if it doesn’t compensate Minsk for changes to oil export taxes. Belarus also signaled it would lift restrictions on the number of U.S. Embassy staff stationed in Minsk.
Ukraine, meanwhile, has continued to accuse Russia of increasing its military presence near their shared border. This may, however, have been posturing by the Ukrainian government ahead of presidential elections this past weekend. The top two vote-getters – a comedian-turned-politician with no political experience and the incumbent president, Petro Poroshenko – will face off in the second round of voting on April 21. The most important takeaway for our forecast is that Russia can live with either of these two candidates, which means the situation in Ukraine is better than we thought it would be following the vote.
In the Black Sea and the Baltic Sea, the U.S. and Russia have increased their presence, but this is mostly just a show of force right now as neither country could carry out military action with the resources they currently have located there.
China will continue to militarize islands in the South China Sea and build up naval, missile and air power capabilities, making it more difficult for outside powers to operate freely in those waters. Japan will take a bigger leadership role in creating a multinational coalition to contain China. India and Australia will become more prominent in the Indian Ocean and in the South Pacific, respectively.
China continues to dictate terms in the South China Sea to its fellow claimant nations and to make modest upgrades to its artificial island bases in the disputed waters. It’s not backing down, and other regional powers are also gradually building up their maritime capabilities and diplomatic capital in response. India, for example, is showing off new naval, missile and anti-satellite technologies – all capabilities that would be crucial in a maritime conflict with its great northern neighbor. It’s also pushing forward with efforts to build its own “string of pearls” via new basing agreements with Oman and France and new facilities in its strategically invaluable Andaman and Nicobar Islands. Japan passed a record defense budget, beefed up its capabilities in the East China Sea, and remains highly active in boosting defense and economic ties with key South and Southeast Asian states. Australia is boosting aid and investment in the South Pacific, expanding military exercises with India and Japan, and deepening cooperation with key states like Thailand, Indonesia and Singapore. The U.S., for its part, has modestly increased its presence in the South China Sea and around Taiwan, and it appears to be on track to put to rest a longstanding point of frustration in Manila with the pair’s Mutual Defense Treaty. In early March, the U.S. Indo-Pacific Command chief admitted that “the Quad” concept – a loose coalition between Australia, Japan, India and the U.S. aimed at containing Chinese assertiveness – may be shelved for the time being, because of India’s concerns over provoking China. But the immediate fate of the Quad matters little so long as cooperation and capabilities among the four members continue to increase.
Brazil will try to strengthen ties with countries in the Northern Hemisphere.
Brazilian President Jair Bolsonaro’s trip to Washington in March confirmed that this forecast is indeed on track. During his visit, Bolsonaro made a handful of unilateral concessions to the U.S., including allowing 750,000 metric tons of U.S. wheat exports to enter Brazil tariff-free, a measure the U.S. requested earlier in the year. The two countries also signed a deal that allows the U.S. access to the Alcantara Launch Center to launch commercial satellites. They have also collaborated on defense issues. A Brazilian general joined the U.S. Southern Command in an advisory role, and the two countries have coordinated their efforts on the Venezuelan crisis. Brazil, however, has been careful not to seem too cozy with Washington, keeping full authority over its border with Venezuela and continuing to seek trade links with China. And it’s not hard to see why Brazil wants to maintain a cohesive relationship with China: According to a study by the United Nations Conference on Trade and Development, Brazilian exports to the U.S. and China could increase by $10.5 billion if the trade war continues.
The Monroe Doctrine will be relevant for the first time since 1991.
Nowhere is this forecast more relevant right now than in Venezuela. The U.S. has recognized opposition leader Juan Guaido as Venezuela’s president and led international efforts to weaken President Nicolas Maduro’s hold on power by imposing new sanctions on Venezuela and giving the opposition access to Venezuelan assets under U.S. jurisdiction. The U.S. also tried but failed to deliver aid to the country. Russia, a supporter of the Maduro government, has been among the most vocal opponents of the U.S. response to the crisis, even reportedly sending military personnel to Venezuela.
The U.S. has also intensified relations with several Caribbean nations – including the Bahamas, Dominican Republic, Haiti, Jamaica, St. Lucia and the Dutch island of Curacao – with promises of increased investment. In El Salvador, the election of Nayib Bukele as president could mean closer ties between the U.S. and the Central American nation. And the U.S. signed agreements with Guatemala, El Salvador and Honduras to conduct joint security operations to improve border security, deter international crime and curb migration.
Uzbekistan will begin to challenge Kazakhstan’s position as Central Asia’s regional power.
This forecast is not developing as quickly as we expected. So far, the competition between countries in Central Asia has been limited. But Uzbekistan continues to court investments from and enhance cooperation with all major players. In the first months of 2019, President Shavkat Mirziyoyev introduced initiatives to develop the country’s digital economy, set up a national defense center and implemented army reforms. He also continued to engage in discussions on border issues with other regional states. In addition, Uzbekistan is hinting that it could be a regional center for important negotiations – the government has invited the Afghan government to hold talks with the Taliban in Tashkent. And with its current pace of development, Uzbekistan could become the largest economy in the Commonwealth of Independent States, a bloc of Central Asian countries. The International Monetary Fund estimates that Uzbekistan’s gross domestic product will grow 5.5 percent in 2019 and could reach 6 percent growth in the coming years.
Kazakhstan hasn’t shown any particular preoccupation with its rapidly growing neighbor, but it’s still working to hold Kazakh positions in the region. Before his abrupt resignation, former President Nursultan Nazarbayev was trying to develop a more effective state apparatus through reforms, which included firing the government at the beginning of the year.
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.
Ahead of the second summit between U.S. President Donald Trump and North Korean leader Kim Jong Un, unlike the run-up to their first meeting, the Trump administration methodically downplayed how much could actually be achieved at the summit, evidently preparing public expectations for a deal in which North Korean denuclearization remained little more than an aspirational long-term goal. The U.S. also appeared to be embracing the reality that any progress with the North would require a long, incremental process with reciprocal concessions from Washington. Once in Hanoi, of course, things quickly fell apart, and Trump and his team walked when Pyongyang reportedly pushed for too much, particularly on sanctions relief. And since then, rhetoric and actions from both sides have started to resemble ever so slightly what we saw in 2017: North Korea is conspicuously building missile sites and saber rattling, while the U.S. is warning about the threat posed by North Korean missiles – and even expanding sanctions pressure with new measures aimed at oil smuggling from China (before, that is, Trump abruptly announced their cancellation in a tweet).
What truly soured the mood is unclear. But what is clear at this point is that little has really changed in the big picture that challenges our forecast. North Korea still has yet to signal any real willingness to fully give up its nukes, but nor has it resumed intercontinental ballistic missile testing – yet. The U.S. and South Korea, meanwhile, sacrificed major annual joint drills that simulate an invasion of the North to keep Pyongyang engaged following the summit. They’ve been replaced with smaller, “defensive” drills, but the change weakens the alliance – as does U.S. pressure on the South to pay dramatically more of the cost of keeping U.S. troops on the peninsula. Moreover, the collapse of the summit hurts Seoul’s plans to win peace with Pyongyang through economic and political engagement, exposing further divergence in the U.S. and South Korean positions.
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’ discussions with the Afghan Taliban have run into some snafus – the Taliban has canceled a couple of meetings, for instance – but signs point toward a deal by year’s end. A draft deal was leaked in January, and in February, the U.S. special envoy for Afghanistan claimed that the parties had agreed on a draft framework, which would include a U.S. withdrawal from Afghanistan and a Taliban pledge to not allow jihadist groups to operate in the country. Even the Taliban, earlier in March, claimed that it’s making progress in talks with the U.S.
Still, sticking points remain; the Taliban refused to speak with the Afghan government, something both the U.S. and Pakistan have been encouraging it to do. Yet the Taliban, which by almost all accounts is still on the offensive and taking back territory, sees little reason to recognize Kabul when the Afghan security forces keep losing battles. Nonetheless, all parties to the negotiations recognize that, in one form or another, the Taliban will either be in charge or retain substantial control in a peace agreement.
Signs of this abound. China has recognized the Taliban as a political force. Iran has had discussions with the Taliban regarding post-occupation Afghanistan. And Russia appears worried enough about a U.S. withdrawal from Afghanistan that it is contemplating opening a second military base in Kyrgyzstan to shore up its buffer zone in Central Asia.
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.
Italy’s tenuous budget compromise with the EU was never going to hold, and that became undeniable once data began to show Italy slipping into recession. A central dispute between the European Commission and the Italian government had been Rome’s growth projections, which Brussels said were too optimistic. Since then, the EC has slashed its 2019 growth forecast for Italy to 0.2 percent from 1.2 percent. In February, EU Finance Commissioner Pierre Moscovici said the two sides would have to reconvene on the budget in May. And on March 24, EC Vice President Valdis Dombrovskis said he expected “difficult discussions” with Rome this summer. For its part, the Italian government has repeatedly ruled out budget corrections and is even working on measures for further tax cuts and additional spending.
Where our forecast has potentially missed the mark was in predicting a breakdown between the Italian coalition partners. To be sure, the rifts between the League and the Five Star Movement are as wide as ever. But at this time, the Five Star Movement is too weak to force a break, and the League, though much strengthened from its 2018 election result, appears disinterested in new elections that could end with more deadlock.
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.
There is perhaps no forecast we have made this year that has seen more developments than this controversial prediction that the U.K. will leave the EU with a deal. The fundamentals that led us to this prediction remain in place: It is not in anyone’s interest for the U.K. to crash out of the European Union without a deal. In that sense, this forecast is an excellent test for whether politics is more important than national interests. There is high-level uncertainty even as this assessment is being written; since British Prime Minister Theresa May was unable to get the House of Commons on board with the deal she had negotiated with the EU, the U.K. no longer has until May 22 to exit the block. Instead, the U.K. must now decide by April 12 between a no-deal departure – likely sometime in early May – or a much longer extension of the negotiations, perhaps through March 2020.
It has been a chaotic beginning to the year for this forecast, but political melodrama and British internal disagreements don’t guarantee this forecast will end up wrong – indeed, they don’t guarantee much of anything right now. We’ll believe the U.K. is going to crash out of the EU with no deal when we see it. In the meantime, the best we can say is given the current process, it’s hard to establish which way things will go.
Economic difficulties and political differences in the EU will exacerbate popular disillusionment with establishment politicians and parties on the left and right.
Saturday protests, sometimes leading to arson, have become the norm in Paris and other French cities. In Italy, the euroskeptic League party has shot up in the polls, but its coalition partner, the anti-establishment Five Star Movement, has plummeted. In Germany, the euroskeptic Alternative for Germany party has fallen well behind the three largest parties. Still, euroskeptic parties are projected to make significant gains in European Parliament elections in May (largely on the back of the Italian League), even if nearly all of them have also abandoned plans to try to take their countries out of the EU.
Iran’s Enemies Strike Back
Iran’s position in Syria and Yemen will weaken.
The December talks in Sweden presented a glimmer of hope for a Yemen peace deal, but the peace has not held. Houthi rebels are still fighting and hold significant territory in Yemen. In Syria, Iran does not appear to be backing out. In fact, there are signs that it is solidifying its presence there, digging in for a longer haul. Iran has reportedly taken control of Syria’s commercial port in Latakia, which would complete its land bridge to the Mediterranean. Reports emerged in early March that Iran was training more Syrian militia fighters (although this could be read as either a bid to increase its influence in the country or an attempt to establish a local security force so it can draw down its own forces). Nevertheless, the fact that Arab states and Israel remain so determined to eject Iran from Syria is another indicator that it has not yet meaningfully reduced its presence in Syria. The Times of Israel reported in late March that Israeli Prime Minister Benjamin Netanyahu floated a plan to Russian President Vladimir Putin to end the Syrian civil war in a way that would include expelling Iran. The report itself isn’t surprising – of course this is what Israel wants – but the fact that the story was covered at all is a sign that Iran’s still in the fray. However, Iran remains under serious financial pressure. In January and February, there were reports in Iranian media of food shortages; at one point, the government even had to import red meat to offset the shortages.
Israel will attack Hezbollah in Lebanon.
There has been a great deal of noise here in the first quarter of the year, but nothing to suggest that an Israeli attack on Hezbollah in Lebanon is imminent. There was Netanyahu’s much ballyhooed statement about preparing for war with Iran, but that was mostly hot air. And besides, Israel has continued to attack opportunistic targets in Syria when the situation calls for it. In the interim, Israel has had more pressing matters to deal with, between domestic political uncertainty heading into elections on April 9 and drama in the Gaza Strip, where twice militants launched missiles that reached the greater Tel Aviv area – a red line for Israel and one that will take the Israel Defense Forces’ focus away from the northern border. That said, the IDF has reportedly raised a new battalion in the north to defend against any potential attack from Hezbollah, and it has conducted military drills in the area as well. For now, though, any potential war between Israel and Hezbollah has been restricted to a war of words, and Israel does not seem prepared to go on the offense with so much going on at home.
Turkey will increase its military presence in Syria. The U.S. will make limited territorial concessions to Turkey on Kurdish autonomy.
The White House’s abrupt announcement of a full withdrawal of 2,000 U.S. troops from Syria in late December (an order made reportedly at Turkish President Recep Tayyip Erdogan’s behest) appeared, for a time, to open wide the door for Turkey to do whatever it pleased, however it pleased, in the Kurdish-dominated regions of northern Syria. But the U.S. move alarmed enough other players in the region, particularly France, Germany and Russia, to ensure that their forces wouldn’t quickly follow suit. Even Ankara expressed concerns about a U.S. departure leaving too big of a vacuum in its wake, at least in part because of the possibility that the Kurds may have no choice but to sue for peace with Damascus. The Pentagon, meanwhile, has since slowed the mad dash for the exits while announcing plans for a modest residual force to stay behind. As a result of all this, along with Ankara’s enduring need for U.S. cooperation on other fronts, Turkey has still yet to follow through with Erdogan’s endless pledges, repeated most recently in February, to deal decisively with the Kurds once and for all. Instead, Turkey has mostly focused on building up loyal proxy forces, continuing coordinated patrols with Russia in Aleppo and Idlib to keep rebels and Syrian forces from restarting the war, and forging an international agreement on a buffer zone free of Kurdish People’s Protection Units east of the Euphrates that meets Turkey’s needs without forcing it to do all the heavy lifting.
Turkey will increase drilling in the eastern Mediterranean and repel foreign presence in what it considers to be its exclusive economic zone around Northern Cyprus.
In February, just a few months after it first started drilling operations in the Mediterranean, Turkey began drilling a second well just off the coast of the southern city of Mersin. We haven’t seen much in the way of threats to stop enforcing the 2016 refugee deal agreed with the EU, but the Turkish government hasn’t been shy about showing force. There has been a spike in Turkish violations of Greek airspace this year. In the most notable example, the Greek prime minister alleged in late March that Turkish fighter jets had harassed his helicopter during a trip to a small Greek island in the eastern Aegean.