A pack of political economists. AFP/Getty Images/Jewel Samad
2013 is likely to be a worse than usual year for economic forecasters. In the big four economic hot spots — the U.S., the euro zone, the Brics and Japan — the politics are likely to matter more than the economics.
Regardless of the U.S. fiscal-cliff deal, the budget and tax reform negotiations that will follow will be far more political than technical discussions. As November’s presidential election fades into false memory, both Democrats and Republicans will claim its outcome as a mandate for their divergent views on how to tackle America’s budget deficit. The country is increasingly partisan, both inside and outside of Washington. The share of Americans living in counties that vote overwhelmingly for one party has doubled since the 1970s. So look for political gridlock risk to be priced first into U.S. government debt.
The European Central Bank held back the euro zone’s crisis from being any deeper than it was in 2012, aiding Greece and backstopping Spain. Street protests from Athens to Lisbon showed how difficult it is for governments to push though the austerity that is a condition for ECB, EU and IMF bailouts. Spain, the next likely candidate, has the additional complexity of regional secessionists. If that prevents the central government accepting the monitoring the troika will need in return for aid, Spanish interest rates will again soar. The same thing will happen to Italy if its spring election produces a more nationalist government. That looks increasingly likely following the departure of the technocrat prime minister Mario Monti. Either eventuality would test the credibility of the ECB and the depth of its pockets.
The ECB has also gained supervisory control over Europe’s larger lending institutions and is seeking to sustain the momentum for Europe’s putative banking union by pushing for rapid granting of the right to wind up failing banking institutions. It is already running into the hard core of German objections. German politicians, who have elections to fight in 2013, are fearful of both yielding to the ECB too much sovereignty over decisions that will have local impact (particularly on jobs) and to being left to pick up the tab for failing banks in other countries.
In the Brics — Brazil, Russia, India and China — growth rates have slowed. Governments are stimulating, running close to winds of inflation. But the key battles for these countries in 2013 will be against dysfunctional regulation and corruption. Supply bottlenecks and prices distorted by politically favored market access and subsidies are notoriously difficult to fix. Russia and China say they will rein in state-owned companies, while Brazil and India are promising lighter subsidies and more open markets. How much political will gets put behind those reforms will determine economic growth in 2013.
In Japan it is not the year-end change of government that will matter to the economy as much as the appointment of a new governor of the central bank in April. The ultra-conservative Masaaki Shirakawa held back from acting decisively to combat deflation during his time as head of the Bank of Japan. New prime minister Shinzo Abe has promised hyper-easy monetary policy to inflate the economy. Assuming Abe survives to April — by no means certain in a country that has had six prime ministers in the past five years — who he puts in the central bank governor’s job will determine how much monetary caution will be thrown to the wind, and thus how much Japan’s stalled economy will grow.
