Q4 is all about political risk, says economist

POLITICS and not data will determine over the next three months as to whether the world economy will make or break in 2013, a senior economist says.

HSBC Bank economist Frederic Neumann commented that the fourth quarter is all about political risk.

"Growth may have started to stabilise, but it is too fragile to withstand policy missteps in the world's leading economies," Neumann said.

While global growth may have started to stabilise at a below trend pace, he said, worries persist that policy uncertainty and indecision could make matters worse.

He thinks that China at least will start to fire up again early next year on the assumption that the political transition proceeds smoothly and important decisions are not delayed.

Neumann, who was at the the recent concluded IMF/World Bank annual meetings in Tokyo last week, described the meed as sombre, added by the recent downgrade in forecasts by the fund.

More worrying was that there were deep disagreements about the appropriate policy response.

"Above all, the world is seemingly devoid of political leadership at the moment."

While the mess is obvious in Europe, the delegates at the meetings were also equally worried about the lack of fiscal clarity in the US.

The fiscal cliff will presumably not be addressed until after the US presidential and congressional elections on November 6, leaving precious little time to avert a growth shock in the first quarter.

"Even if a last minute compromise can blunt the impact of the looming fiscal cliff, the drag from the public sector in the US might be bigger next year than in the eurozone."

But the West is not alone, he said.

In China, for instance, it is not yet clear what the government's response will be to the current downturn and there is no roadmap of how the country will deploy its fiscal levers in the coming quarters.

The Communist Party will hold its Congress on November 8 but the transition process will last until March 2013 when the top government posts change hands.

In the case of Japan, Neumann said it is political gridlock which has so far prevented the passage of legislation to finance the ongoing budget.

The government appears ready to call an election in the coming months, suggesting that major policy changes will be put off for quite some time, including additional fiscal support for the economy.

"If politics in the next few months doesn't derail the global economy altogether, we suspect that at an annual meeting in the not too distant future that is precisely the topic that will need to be discussed."