Stratfor THIRD QUARTER FORECAST 2009 (PART 1): GLOBAL TRENDS

THIRD QUARTER FORECAST 2009 (PART 1): GLOBAL TRENDS

Editor's Note: Our third quarter forecast is intended to be a supplement to our
annual forecast and second quarter forecast. Here we have extracted the critical
global trends identified in our previous forecasts and indicated what is coming
in the next three months.

Introduction

The most important geopolitical issue continues to be the global economy and how
the recession is reshaping the global economic system. From the beginning of the
subprime crisis, STRATFOR has held the view that while the financial havoc will
be substantial, the recession that results from it will be fairly routine in
terms of post-war recessions. It might last a bit longer, go down a bit more,
but it would not shift the cycles that have been in place since World War II.

We are comfortable with our prediction for the United States. Since World War
II, a variety of models have succeeded each other within the dominant general
paradigm of growth and rapid technological innovation. There have been
sub-cycles of expansion and recession ending in 1948, 1970, 1982 and 2000. Each
of these had very different patterns, but all of them had far more in common
than any had with pre-war models. Our view is that the newest sequence of this
post-war pattern is emerging, but that the post-war paradigm itself has not
changed.

In this sense, we are comfortable that the United States is beginning to emerge
from its recession, but that deleveraging -- what economists have taken to
calling paying off debts -- will continue to retard economic growth. There is a
huge distinction between this and the catastrophic busts prior to World War II.
As we once put it at the beginning of this crisis, this isn't the big one. This
quarter will begin showing that.

However, what is true for the United States is not necessarily so for the rest
of the world. Europe is trying to come to grips with the fact that its
multi-national institutions seized up, and that each nation-state had to sort
things out for itself. They will grope for a way to deal with these challenges
this quarter. The Chinese are facing the uncomfortable fact that being the
ultimate exporter of goods makes them the ultimate candidate for unemployment
when other economies decline. And in the Russian participation in the Opel
bailout, we see the Russians pulling together assets from their own battered
economy to tie the Germans even closer to them.

This is part of a broader Russian effort to roll back U.S. influence by
increasing its power all along its periphery -- from Central Asia and the
Caucasus to Germany and the Baltic states. Most of Russia's tools in this effort
have not been weakened in the slightest by the economic downturn, even though by
most measures the recession has been far more crushing in Russia than in the
United States or even Europe. While Moscow still has some damage control to take
care of on the economic front, it also has a busy foreign policy agenda. Left
with a bad taste in its mouth from its recent negotiations with U.S. President
Barack Obama, Russia will focus its attention in the next quarter on
complicating U.S. relations with key countries -- namely Poland, Germany, Turkey
and Iran. Russia's relationship with Iran, in particular, bears close watching
in the coming weeks and months. Washington is already hitting a dead end in its
negotiations with Iran and a surge of Russian influence in Iran will only
exacerbate Washington's ongoing struggle in the Islamic world.

These dynamics aside, the name of the global game remains the economy. We expect
this to be the quarter in which the United States at least begins its long climb
out of the hole it has been in -- the time when things stop getting worse --
while for other countries, good times will be long in coming.

Primary Forecast

Global trend: The economy

The trajectory of the global economy depends largely on how well -- and how soon
-- the United States recovers from recession. East Asian manufacturing- and
export-oriented economies are paying particularly eager attention to American
developments, while the more diversified economies of Europe are actually likely
to be left behind somewhat. Meanwhile, oil-exporting Middle Eastern states like
Saudi Arabia and Kuwait are putting their large cash reserves to use while
looking for solid evidence of a U.S. recovery that can sustain the price of oil.
There might not be irrefutable evidence of a recovery yet, but the U.S. economy
is displaying some positive signs.

When evaluating the condition of the U.S. economy, STRATFOR considers four
factors: the presence of any systemic shocks, the stock markets (a leading
indicator), new unemployment benefits claims (a lagging indicator) and the
balance between retail sales and inventories (a mixed lagging/leading
indicator). In the second quarter, these measures were positive.

The biggest shock to the U.S. economy we saw was the failure of two of the three
major U.S. automakers. The glory days of the American automotive sector are
firmly in the past, and liquidation is probably an economic necessity in the
long run. But an immediate liquidation would trigger so many job losses that
talk of any economic recovery in 2009 would end. The government-brokered
bankruptcy/bailout packages, while starting the industry down the road to
liquidation, will defer most of the pain to another day. In essence, what is
left of the sector is being put on a sort of government-funded life support.
This will cost the United States in economic efficiency overall, but should
delay the pain sufficiently so that the automakers' eventual liquidation will
not unduly hamper what STRATFOR sees as a building recovery in the latter half
of 2009.

The S&P 500 Index is now up more than 30 percent since its low in March, in
sharp contrast to the volatile and distressing performance of the previous six
months. As stock market performance tends to be a leading indicator, this is
very positive news.

New unemployment claims in the United States -- after a year of tracking higher
-- have stabilized, and have now fallen considerably from their March highs.
While still uncomfortably high at 565,000 -- anything over 400,000 indicates a
weak labor market -- unemployment claims are moving in the right direction and
are a lagging indicator, one of the last things that improves as the economy
mends.



Against all odds, retail sales have held relatively steady -- almost all of the
drops of the past year were limited to gasoline and automobile sales --
indicating that while American consumers have been rattled, they have not been
fundamentally damaged. With inventories continuing to drop and retail sales
holding steady, we are coming closer to the point where retailers will have to
initiate orders to fill their shelves -- a development which would stimulate
production and with it employment. Moreover, we are already seeing positive
movement in various manufacturing indices. In fact, in both May and June, even
automobile sales were positive for the first time since the recession began.

Considering these factors together, STRATFOR is cautiously optimistic for
American economic growth in the third quarter. But this does not mean we expect
strong growth. Data from the U.S. Federal Reserve indicates that growth in bank
lending has yet to return to pre-recession levels. Until private credit is
flowing again, the economy will find healing difficult.

(click image to enlarge)



In the broader international picture, there are signs that the credit
environment is loosening, and while it is an overstatement to say that this is
fixing everything, the increasing availability of credit is certainly mitigating
the recession's effects.

At the height of the panic in September 2008, money from all over the world
flooded into short-term U.S. government bonds, widely considered the safest and
most liquid asset in the world (next to simply holding cash). In the second
quarter of 2009, that flow began reversing. Confidence is rising somewhat and it
is leading investors to begin -- tentatively -- to seek out opportunities. Such
action is how global recessions usually begin easing.



And there is more than private investment at work. The International Monetary
Fund (IMF) has used two programs to stabilize a broad array of emerging
economies. The IMF has allotted $48 billion to help reform mismanaged economies
in need of major surgery, and has earmarked another $52 billion for credit lines
for states whose management has been sound but simply got caught up in the
global recession.

Taken together, these factors tell us that not only has the U.S. economy
experienced a substantial improvement since the first quarter, but that there is
now reason to begin feeling some cautious optimism about the rest of the global
economy.

But not everything is cause for cautious optimism. In fact, Europe -- after four
consecutive quarters of negative growth more than twice as harsh as what the
United States has suffered -- is just now beginning its recession. The European
banking system faces far more numerous and far more severe problems than its
U.S. counterpart, and is only beginning to notice that its problems existed long
before the American-triggered credit crunch. If the third quarter proves to be
less distressing for the Europeans than the first half of the year, it will only
be because rising demand in the United States is assisting their export markets.
STRATFOR expects European demand to remain weak, largely due to the faltering
local banking system.

Global trend: The Russian resurgence

In STRATFOR's 2009 annual forecast, we outlined how one of the year's dominant
issues would be Russia's effort to force the United States to make a strategic
bargain: Russia would grant U.S. forces a northern supply route into Afghanistan
in exchange for an expunging of Western influence from former Soviet territory.
At the start of the second quarter, Russia made a tentative offer on the supply
route issue but was quickly rebuffed during a meeting with Obama, and both
countries slid back into their confrontational stances. When this occurred,
STRATFOR forecasted that Russia would redouble its efforts and consolidate its
position in Ukraine, Georgia, Armenia and Azerbaijan -- which Moscow
accomplished masterfully.

Like clockwork, another chance for Russia to bargain with the United States came
at the start of the third quarter, during Obama's visit to Moscow. As before,
Russia tentatively gave in on supply routes to Afghanistan and was rebuffed by
the United States on the issues Moscow considered vital: a public repudiation of
NATO expansion, abandonment of ballistic missile defense (BMD) in Poland and
Washington's general refusal to admit to Russia a sphere of influence in the
former Soviet space.

Since this is the second time this year Moscow has been in this situation, it
knows it cannot allow Washington to continue dismissing it. Russia has been in
such a position before -- in the aftermath of Kosovar independence. Moscow's
response to Washington's moves then was to invade Georgia in August 2008 and
prove that the United States would not be able to rescue its ally in the
Caucasus.

This time around, Russia has laid the groundwork for some more interesting moves
against U.S. interests.

Russia's moves in the former Soviet states of Ukraine, Georgia, Armenia and
Azerbaijan will continue, with Russia already holding the upper hand in each
state. Moscow is prepared for new elections in Ukraine -- whenever Kiev finally
holds them -- and has ties to, or outright controls, every major candidate
running but one. Russia has destabilized Georgia on many fronts by increasing
its military presence on Georgia's northern and southern borders and funding the
opposition to sustain chaos in the capital. Russia has also maneuvered its way
into the middle of talks between Armenia and Azerbaijan over the secessionist
region of Nagorno-Karabakh as well as talks between Armenia and Turkey over the
restoration of diplomatic ties between the two. Currently, Moscow holds the
reins in both situations -- demonstrating its total control over Armenia and its
rising influence over Azerbaijan.

Russia has also laid the groundwork to counter U.S. influence in the former
Soviet areas of the Baltics and Central Asia. The Baltics are particularly
significant since they are both NATO and EU members, and vehemently
anti-Russian. But they are also in a tailspin due to the global financial crisis
and resulting political turmoil. Russia is more actively funding -- and
manipulating -- Russia-friendly political parties in the Baltics and leveraging
the resulting social tension this generates. In Central Asia, each state except
Uzbekistan has increased its ties to Russia in the last quarter, in essence
giving Moscow control of the routes that the United States wants to use to
supply its forces in Afghanistan.

It is relatively easy for Russia to meddle in former Soviet states, but there
are four other countries -- Turkey, Germany, Poland and Iran -- that are vital
to the United States' global strategy and are places where Russia aims to exert
influence.

Russia wants to ensure that Turkey's newfound confidence (see the Middle Eastern
section in this report) does not lead it to join the Americans in challenging
Moscow, and so it is dangling the prospect of better relations with Armenia and
preferential access to Russian energy in front of Ankara. It is not so much of a
zero-sum game -- a rare thing in Russian strategy -- as it is Moscow offering
itself to Ankara as a lever in other relations. The two are experimenting with
using each other against third parties -- Turkey using Russia to push forward
its EU membership bid, Russia using Turkey to increase its energy leverage over
Europe -- to achieve unrelated goals. Further developments in this relationship
will be seen when Russian Prime Minister Vladimir Putin travels to Ankara in
August.

The other influential NATO ally, Germany, has also been growing very close to
Russia as a rift has developed between Berlin and Washington. Germany feels that
the United States has abandoned it during the economic crisis, and so Russia has
stepped in by offering investments into key industries. Add in Germany's
existing dependence on Russian energy, and Germany's willingness to challenge
Russia seems to be shrinking. And with Germany the central EU power and a major
player in NATO, the unity of both organizations is coming into question --
something Russia has been after for decades. The biggest saving grace for the
Western institutions in the third quarter is that Germany is too distracted to
do anything overly bold -- it is election season.

Poland is an odd state for Putin to visit -- he will be doing so Sept. 1 --
considering how Poland fears Russia, and until now Russia only dealt with the
Poles through the Americans. But now Putin is addressing Poland directly to see
if he can make any progress in loosening the American-Polish alliance. Sticks
will be in abundance. What one must watch for is the carrots.

Iran is one of the easiest -- and most effective -- cards for Russia to play.
Moscow has already blocked discussion of U.N. sanctions against Iran, and it is
almost certain to continue doing so. But if Russia wants to up the ante, it
could cause trouble for Washington directly and quite easily by furthering its
support for Tehran's nuclear program or delivering more military hardware, such
as the S-300 strategic air defense system, to Iran. This would do more than
disturb bilateral U.S.-Iranian relations; it would ripple through domestic U.S.
politics and security efforts in Iraq. Iran is an a vulnerable issue for the
United States. Russia has been wary of using this card, but Moscow might feel
that it is at the point where it must be played.

Russia has a multitude of big and small tools available for use against the
United States. Some moves have already begun, while the groundwork has been laid
for others. But the window of opportunity granted by American deployments to the
Middle East will not be open forever. Russia must act in the next two quarters
to limit American power. Soon, American troops currently stationed in Iraq will
become available for other deployments -- deployments that could potentially
limit Russian options. If not, then the United States will have the opportunity
to prove that it is Russia -- not the United States -- that is overstretched and
past its prime.

Global trend: The U.S.-jihadist war

The United States is steadily shifting focus away from the dwindling war in Iraq
to the next phase of the war in Afghanistan. The extent to which the United
States is able to shift gears from the Middle East to South Asia will depend in
large part on how the Iraqis manage their own security over the next several
months.

Sectarian tensions in Iraq are already rising as political and energy battles
are heating up ahead of the January 2010 parliamentary elections. At the same
time, U.S. forces are withdrawing from Iraqi cities and are thus removing a
crucial buffer between Iraq's feuding sects. Though the United States still has
sufficient forces in Iraq to put out sectarian fires that Iraqi security forces
may prove incapable of handling on their own, any flare-ups will directly affect
the U.S. timetable to pare the 130,000 troops that remain in the country and
free up forces for Afghanistan. Iraq will hold itself together in the coming
months, but the withdrawal process will be difficult and slow.

In Afghanistan, signs of a revised strategy will come to light in the coming
quarter as U.S. forces move away from offensive combat operations to traditional
counterinsurgency doctrine, where success is not measured strictly by territory
reclaimed or the number of Taliban militants killed, but rather by the ability
of U.S. and NATO forces to protect the local population, build institutions from
scratch and provide enough local governance to deprive the enemy of a viable
support base. In essence, this is the long-haul "hearts and minds" campaign that
(thus far) has prevailed in the Washington debate over how to best manage the
war in Afghanistan. The strategy has gone into effect, but definitive results
will not be seen in the third quarter.

As STRATFOR said in our previous quarterly forecast, there are vast tactical
differences between Iraq and Afghanistan, and a divide-and-conquer approach
holds low prospects for success while the Taliban feel little inclination to
negotiate with an occupying force that has a limited attention span for such
resource- and time-intensive wars. One of the most critical flaws in the
counterinsurgency plan is that it assumes the enemy will provide the space and
time for the strategy to yield results. The Taliban may live in caves, but they
understand the U.S. political sensitivities to war casualties.

As a surge of 17,000 troops and some 4,000 police trainers into Afghanistan
wraps up this quarter to boost security for the August national elections, the
media's attention will focus on U.S.-led military offensives in southwestern
Taliban strongholds. The flight of Taliban militants from these areas is not a
clear measure of success, however. The Taliban will not launch their
counteroffensive where U.S. troops are concentrated. In the face of overwhelming
firepower, insurgents will withdraw, disperse and target vulnerable supply
lines, patrols and security outposts that are expected to increase with the new
U.S. strategy. The increasing tempo and spread of attacks by Taliban and their
al Qaeda affiliates in Afghanistan suggest that this is an insurgent force that
still has room to mature on the battlefield -- which would mean that the full
extent of the Afghan challenge has yet to be seen.

Elections in Afghanistan could give the Taliban a symbolic opportunity to carry
out attacks and for U.S. and NATO forces to demonstrate some level of public
intolerance of Taliban rule, but the overall effect of the elections will be
minor. Despite his unpopularity, a lack of credible competition is likely to
allow Afghan President Hamid Karzai to retain his position, and the government
that emerges from the election will be no less plagued by internecine rivalry
among feuding tribes and warlords than the current one.

On the other side of the Durand Line, Pakistani forces are going on the
offensive against local Taliban militants in the country's northwest. The irony
of the situation is that this renewed vigor in Pakistan's fight against its
former militant proxies is more likely to hamper than help the U.S.
counterinsurgency efforts in Afghanistan.

STRATFOR failed to anticipate the Swat offensive that was launched in the early
part of the second quarter, and forecasted instead that Pakistan would stick to
ineffectual deal-making and shy away from military combat to cope with its
jihadist problem. But the collapse of a peace deal (just a few days after our
last quarterly forecast was published), the rapid Taliban spread in Swat and
surrounding areas in the North-West Frontier Province and a wave of deadly
suicide attacks struck a nerve in Islamabad. Taliban activity in the northwest
periphery is one thing, but any sign of Taliban encroachment in the Punjabi
heartland is far too close for comfort in Islamabad's view. Pakistani forces'
ability to hold the territory they have reclaimed in Swat remains in doubt,
especially as the Taliban have proven their ability to disperse, regroup and
then return to areas where local governance and security remain dangerously weak
and vulnerable.

While struggling to hold ground in Swat, Pakistani forces will begin focusing on
an ongoing offensive in South Waziristan. This offensive, however, is vastly
different from the operation in Swat and poses far greater challenges. The
Pakistani objective in this offensive is thus extremely narrow in scope: to
neutralize the network of leading Pakistani Taliban commander Baitullah Mehsud,
who has demonstrated a capability to carry out large-scale attacks well beyond
Pakistan's northwest tribal regions. By focusing on Mehsud, the military is
drawing a line in the sand and illustrating the consequences of turning against
the state. But the challenges in Waziristan are already mounting, as Mehsud is
doing an effective job of bribing and intimidating local tribes into cooperating
against the military.

The Waziristan offensive will consume Pakistan's attention in the coming quarter
but will do very little to aid the American war effort in Afghanistan. In
conducting this offensive, Pakistani military commanders are sticking to their
tradition of distinguishing between "good" and "bad" Taliban. Mehsud is on the
hit list, but there are still scores of other jihadist groups operating on
Pakistani soil that Islamabad continues to view as long-term assets to use
against India and to retain influence among Pashtuns in Afghanistan. In
Pakistan's mind, the only way to avoid turning every Pashtun against the state
is to turn a blind eye to, and occasionally facilitate, jihadist movement into
neighboring Afghanistan, thereby further complicating U.S.-NATO operations in
the region.

For the United States, some action by the Pakistani military is better than no
action at all. While Pakistan is engaged in this military offensive, it is more
capable of fending off U.S. pressure. This dynamic makes India especially
nervous and will lead to friction between Washington and New Delhi, even if only
behind closed doors. Pakistan's preservation of militant assets for use against
India is naturally New Delhi's main concern. Although the Indians have preferred
to remain on the sidelines of this conflict and leave it to the Americans to
deal with the Pakistanis, any slackening of U.S. pressure on Islamabad will mean
that Washington will have to spend more time trying to assuage Indian concerns.

While India remains on alert for jihadist spillover from Pakistan, it is also
dealing with other distractions at home. A growing Naxalite insurgency along the
eastern belt of the country is gaining traction and exposing just how unequipped
the state is to deal with internal security threats. And while the ruling
Congress party is in a stronger political position after its recent election
victory, the party's enhanced political clout will do little to improve India's
national security infrastructure or speed up the country's recovery from the
global economic crisis.

Part Two: Third Quarter Forecast 2009: Regional Breakouts


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