Elections in the emerging world to cause changes in macro policy – CE

Economists at Capital Economics take stock of the key elections that are scheduled around the world in the coming year and discuss the implications for economic policy. While elections in advanced economies are unlikely to produce any decisive changes in direction, there are a few to keep an eye on in the emerging world. 

Key quotes

“Angela Merkel’s looming departure as German chancellor will be of historical significance but is unlikely to have major consequences for economic policy in Germany or for the EU. With Merkel’s centre-right CDU/CSU comfortably ahead in the polls, the party is on course to remain the largest in the Bundestag. There is always a risk that a good showing of support for populists could influence the new chancellor’s thinking on Europe. But this risk has receded as the AfD party’s support has diminished over the past year.”

“In the Netherlands and Norway, given that the structure of the political system provides even less scope for major swings in economic policy, we do not expect any significant changes. The rise in political tensions in the Netherlands over a child benefits scandal does not appear to have had a major impact on the current largest party’s popularity.”

“In Japan, with the opposition parties still weak and none currently polling above 10%, the ruling LDP is set to win another majority in the general election which must take place by October. Regardless of whether Suga hangs on to the office of Prime Minister, his party is likely to stay the course of ‘Abenomics’. We expect monetary policy to remain ultra-loose, modest fiscal tightening once virus conditions allow, and moderate progress on structural reforms.”

“There is one curveball in DMs, and that’s Italy. We assume that a new coalition is formed without the need for an election and that, in the meantime, the ECB will keep Italian bond yields within a narrow band. However, if there is another election, polls suggest that it would produce a right-wing, eurosceptic coalition. Such a government would probably push for tax cuts and be more willing to clash with the EU over fiscal policy. But with the EU’s fiscal rules suspended, this risk would be unlikely to materialise for a few more years until after the worst of the pandemic had passed.”

“In Latin American countries, anti-austerity sentiment has been growing, exacerbated by the economic fallout from the pandemic. As a result, we expect populists pushing loose fiscal policy to make headway. And in India, a strong performance for Modi’s BJP in state elections may be enough to convince PM Modi that labour market liberalisation is not unviable and could lead to a ramping up of labour reforms.”