November 4, 2012 / 7:07 PM / 8 years ago

Politics call the tune in U.S, China and Europe

LONDON (Reuters) - In the politically packed days ahead, an election, a coronation and a two-part parliamentary vote each has the potential to alter the course of the global economy for years to come.

The election, of course, is on Tuesday for the White House and Congress. Two days later, China’s ruling Communist party begins the 18th congress in its history.

Barring one of the biggest political surprises in modern times, the carefully choreographed gathering will culminate a week later in the crowning of Xi Jinping as successor to Hu Jintao. He will hold the reins of power for the next decade.

That the world’s two biggest economies are choosing their leaders at the same time is unprecedented. Investors are right to be transfixed.

Yet arguably it is a pair of votes in Greece, an economic minnow, on whether to accept labor reforms and more austerity that could have a greater short-term impact on financial markets.

In the U.S. election, markets are pricing in the status quo - victory for Barack Obama in enough swing states to return him to the presidency to renew battle over tax and spending with a hostile House of Representatives and a bitterly divided Senate.

The outcome of talks over the ‘fiscal cliff’ - a package of tax increases and spending cuts that will take effect in January if there is no long-term pact to cut the budget deficit - is already a major uncertainty for markets.

Tuesday’s voting could muddy the waters even further.

“It’s not easy to map out what the outcome of the election will mean for policy, both immediately afterwards and also for next year,” Bruce Kasman, an economist with J.P. Morgan, said on a conference call.

In any event, Bill Adams, an economist at PNC Financial Services Group in Pittsburgh, said negotiations on the fiscal cliff would have a greater impact on growth for 2013 than Tuesday’s election itself.

“Similarly, with the 18th Party Congress in China, we know who’s going to win THAT election. The odds for an upset coming out of those two events are relatively small,” Adams said.


As for Greece, the assumption is that Prime Minister Antonis Samaras’s coalition will muster enough support on Wednesday to win a vote on structural reforms and a follow-up vote on Sunday on an austerity budget for 2013.

But it will be a close call.

Holger Schmieding, an economist with Berenberg Bank in London, said it might take the defection of just three more coalition lawmakers to doom the reform package.

“In this unlikely but not completely impossible case, the euro zone could be headed for a period of turmoil,” Schmieding said in a note. “The Grexit debate could be back with a vengeance despite the clear desire of Germany to keep Greece in the euro.”

He saw a 25 percent chance of Grexit - Greece’s exit from the euro - in the next six months.

At the very least, the tight votes will show that Greece is reaching the limit of its capacity to accommodate its international creditors, who are demanding ever more austerity to hit deficit goals that grow ever more distant the longer the economy contracts. Greece is now in its sixth year of recession.

“There isn’t an effective pro-growth policy for the euro zone right now,” Adams said. “Sooner or later the political process will have to acknowledge that this policy mix isn’t working, and that will open a lot of rifts.”


The financial crisis in the euro zone, which is flirting with recession, is still the biggest obstacle to global growth, according to a senior U.S. official.

Nevertheless, a Reuters survey of 73 economists saw an 80 percent chance that the European Central Bank would hold its main refinancing rate unchanged at 0.75 percent on Thursday.

In the same vein, economists attached just a 40 percent probability to a further round of asset purchases from the Bank of England, which also meets on Thursday. The odds on extra monetary easing have lengthened since the British economy grew more strongly than expected in the third quarter.

The biggest day for data could be Friday, when China issues investment, retail sales and industrial output figures for October.

But this is a week for the political economy, and the main focus will be on any signals from the party congress in Beijing that a change at the top might augur a quick shift in economic policy to spur consumption.

Nothing is impossible, but China-watchers reckon gradualism will remain the hallmark of what is a collective leadership. The new team will need time to consolidate its grip on power.

Economists at Barclays Capital led by Yiping Huang said consideration of systemic policy changes is probably a year away, but the new leaders could show their reformist credentials by picking low-hanging fruit in areas such as resource pricing, income distribution and tax policy.

“We might start to hear such discussions at the annual economic work conference in early December or at the National People’s Congress in early March,” they said in a report.

Editing by Patrick Graham

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