Back in May 2012, Peter Brookes of the American Foreign Policy Council said that "North Korea is a wild card -- and a dangerous one at that." He predicted that the inexperienced Kim Jong Un would want to appear "large and in charge," for internal and external consumption. In December, Pyongyang launched a long-range ballistic missile -- one that South Korean scientists later said had the range to reach the U.S. West Coast. Unlike the failure of the previous missile launch in 2009, it managed to put a satellite into orbit.
The last two such launches have been followed by nuclear weapons tests -- in 2006 and 2009. Recent satellite images of the weapons test site analyzed by the group 38 North show continued activity there.
So the decision becomes a political one. Does Kim continue to appear "large and in charge" by ordering another test? Or have the extensive reshuffles and demotions of the past year already consolidated his position, allowing him to focus on the country's dire economic situation?
China-Japan island dispute to simmer
It's been a while since East Asia has thrown up multiple security challenges, but suddenly North Korea's missile and nuclear programs are not the only concern in the region. There's growing rancor between China and Japan over disputed islands in the East China Sea, which may be aggravated by the return to power in Japan of Shinzo Abe as prime minister.
Abe has long been concerned that Japan is vulnerable to China's growing power and its willingness to project that power. Throughout 2012, Japan and China were locked in a war of words over the Senkaku or Diaoyu islands, with fishing and Coast Guard boats deployed to support claims of sovereignty.
In the days before Japanese went to the polls, Beijing also sent a surveillance plane over the area, marking the first time since 1958, according to Japanese officials, that Bejing had intruded into "Japanese airspace." Japan scrambled F-15 jets in response.
The islands are uninhabited, but the seas around them may be rich in oil and gas. There is also a Falklands factor at play here. Not giving in to the other side is a matter of national pride. There's plenty of history between China and Japan -- not much of it good.
As China has built up its ability to project military power, Japan's navy has also expanded. Even a low-level incident could lead to an escalation. And as the islands are currently administered by Japan, the U.S. would have an obligation to help the Japanese defend them.
Few analysts expect conflict to erupt, and both sides have plenty to lose. For Japan, China is a critical market, but Japanese investment there has fallen sharply in the past year. Just one in a raft of problems for Abe. His prescription for dragging Japan out of its fourth recession since 2000 is a vast stimulus program to fund construction and other public works and a looser monetary policy.
The trouble is that Japan's debt is already about 240% of its GDP, a much higher ratio than even Greece. And Japan's banks hold a huge amount of that debt. Add a shrinking and aging population, and at some point the markets might decide that the yield on Japan's 10-year sovereign bond ought to be higher than the current 0.77%.
Economic uncertainty in U.S., growth in China
So the world's third-largest economy may not help much in reviving global growth, which in 2012 was an anemic 2.2%, according to United Nations data. The parts of Europe not mired in recession hover close to it, and growth in India and Brazil has weakened. Which leaves the U.S. and China.
At the time of writing, the White House and congressional leadership are still peering over the fiscal cliff. Should they lose their footing, the Congressional Budget Office expects the arbitrary spending cuts and tax increases to be triggered will push the economy into recession and send unemployment above 9%.
A stopgap measure, rather than a long-term foundation for reducing the federal deficit, looks politically more likely. But to companies looking for predictable economic policy, it may not be enough to unlock billions in investment. Why spend heavily if there's a recession around the corner, or if another fight looms over raising the federal debt ceiling?
In September, Moody's said it would downgrade the U.S. sovereign rating from its "AAA" rating without "specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term." In other words, it wants action beyond kicking the proverbial can.
Should the cliff be dodged, most forecasts see the U.S. economy expanding by about 2% in 2013. That's not enough to make up for stagnation elsewhere, so a great deal depends on China avoiding the proverbial hard landing.
Until now, Chinese growth has been powered by exports and infrastructure spending, but there are signs that China's maturing middle class is also becoming an economic force to be reckoned with. Consultants PwC expect retail sales in China to increase by 10.5% next year -- with China overtaking the U.S. as the world's largest retail market by 2016.
Europe's economic outlook a little better
No one expects Europe to become an economic powerhouse in 2013, but at least the horizon looks a little less dark than it did a year ago. The "PIGS' " (Portugal, Ireland/Italy, Greece, Spain) borrowing costs have eased; there is at least rhetorical progress toward a new economic and fiscal union; and the European Central Bank has talked tough on defending the Eurozone.
Mario Draghi, president of the European Central Bank, fended off the dragons with the declaration in July that "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
Draghi has promised the bank has unlimited liquidity to buy sovereign debt, as long as governments (most likely Spain) submit to reforms designed to balance their budgets. But in 2013, the markets will want more than brave talk, including real progress toward banking and fiscal union that will leave behind what Draghi likes to call Europe's "fairy world" of unsustainable debt and collapsing banks. Nothing can be done without the say-so of German Chancellor Angela Merkel, renowned for a step-by-step approach that's likely to be even more cautious in a year when she faces re-election.
Elections in Italy in February may be more important -- pitching technocrat Prime Minister Mario Monti against the maverick he replaced, 76-year old Silvio Berlusconi. After the collapse of Berlusconi's coalition 13 months ago, Monti reined in spending, raised the retirement age and raised taxes to bring Italy back from the brink of insolvency. Now he will lead a coalition of centrist parties into the election. But polls suggest that Italians are tired of Monti's austerity program, and Berlusconi plans a populist campaign against the man he calls "Germano-centric."
The other tripwire in Europe may be Greece. More cuts in spending -- required to qualify for an EU/IMF bailout -- are likely to deepen an already savage recession, threatening more social unrest and the future of a fragile coalition. A 'Grexit' from the eurozone is still possible, and that's according to the Greek finance minister, Yannis Stournaras.
Expect to see more evidence of climate change
Hurricane Sandy, which struck the U.S. East Coast in November, was the latest indicator of changing and more severe weather patterns. Even if not repeated in 2013, extreme weather is beginning to have an effect -- on where people live, on politicians and on the insurance industry.
After Sandy, New York Gov. Andrew Cuomo said that after "the last few years, I don't think anyone can sit back anymore and say, 'Well, I'm shocked at that weather pattern.' " The storm of the century has become the storm of every decade or so, said Michael Oppenheimer, professor of geosciences at Princeton.
"Climate change will probably increase storm intensity and size simultaneously, resulting in a significant intensification of storm surges," he and colleagues wrote in Nature.
In the U.S., government exposure to storm-related losses in coastal states has risen more than 15-fold since 1990, to $885 billion in 2011, according to the Insurance Information Institute. The Munich RE insurance group says North America has seen higher losses from extreme weather than any other part of the world in recent decades.
"A main loss driver is the concentration of people and assets on the coast combined with high and possibly growing vulnerabilities," it says.
Risk Management Solutions, which models catastrophic risks, recently updated its scenarios, anticipating an increase of 40% in insurance losses on the Gulf Coast, Florida and the Southeast over the next five years, and 25% to 30% for the mid-Atlantic and Northeastern states. Those calculations were done before Sandy.
Inland, eyes will be trained on the heavens for signs of rain -- after the worst drought in 50 years across the Midwest. Climatologists say that extended periods of drought -- from the U.S. Midwest to Ukraine -- may be "the new normal." Jennifer Francis at the Institute of Marine and Coastal Sciences at Rutgers University has shown that a warmer Arctic tends to slow the jet stream, causing it to meander and, in turn, prolong weather patterns. It's called Arctic amplification, and it is probably aggravating drought in the Northwest United States and leading to warmer summers in the Northern Hemisphere, where 2012 was the hottest year on record.
It is a double-edged sword: Warmer temperatures may make it possible to begin cultivating in places like Siberia, but drier weather in traditional breadbaskets would be very disruptive. The U.N. Food and Agriculture Organization reports that stocks of key cereals have tightened, contributing to volatile world markets. Poor weather in Argentina, the world's second-largest exporter of corn, may compound the problem.
More cyber warfare
What will be the 2013 equivalents of Flame, Gauss and Shamoon? They were some of the most damaging computer viruses of 2012. The size and versatility of Flame was unlike nothing seen before, according to anti-virus firm Kaspersky Lab.
Gauss stole online banking information in the Middle East. Then came Shamoon, a virus that wiped the hard drives of about 30,000 computers at the Saudi oil company Aramco, making them useless. The Saudi government declared it an attack on the country's economy; debate continues on whether it was state-sponsored.
Kaspersky predicts that in 2013, we will see "new examples of cyber-warfare operations, increasing targeted attacks on businesses and new, sophisticated mobile threats."
Computer security firm McAfee also expects more malware to be developed to attack mobile devices and apps in 2013.
U.S. Defense Secretary Leon Panetta is more concerned about highly sophisticated attacks on infrastructure that "could be as destructive as the terrorist attack on 9/11."
"We know that foreign cyber actors are probing America's critical infrastructure networks. They are targeting the computer control systems that operate chemical, electricity and water plants and those that guide transportation throughout this country," he said in October.