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      How will the world shape up in 2013?

      How will the world shape up in 2013?

      The global economy will continue to improve slowly with growth around 3% in 2013, according to forecasts from the Swiss UBS bank. Larry Hatheway is Managing Director and Chief Economist at UBS Investment Bank. During a press conference at UBS Luxembourg, he spoke about China’s economic acceleration and the Eurozone’s slowing decline.

      “The Eurozone is in a recession but the situation is not getting worse. Politics is where the risks reside”, Larry Hatheway explains. The Chief Economist at UBS Investment Bank sees four distinct risks over the next six months. One of these risks is the election in Italy, where the markets are anticipating a narrow victory for the centre-left. Almost any other outcome will be a disappointment for the markets.

      What about a comeback by Silvio Berlusconi? “For the European dynamic, in terms of Italy’s relationship with its European partners, it is going to be interpreted as negative. On the other hand, Berlusconi and his governments, like most of  the last 15 to 20 years, have also been unfairly characterised in some areas of economic policy. Over the last 20 years, the country has always run a primary surplus”.

      The second and the third risks are slightly more market related. First, there is the amount of debt issuance Spain still has to do: close to a hundred billion euros for the remainder of the year. Second, the negotiation for a financial assistance package for Cyprus is quite challenging too. In Germany, where elections are coming up in September, this might be perceived as dubious, because it is seen as bailing out Russian oligarchs, Mr Hatheway remarks.

      Cyprus might ask for as much as 17 billion euros, which is close to 100 % of its GDP. “Whatever terms are imposed on Cyprus  would likely be imposed on Spain and others too. If Cypriot banks, their depositors and creditors were forced to take a haircut that would be a very adverse signal to the Spanish banking community”.

      The outcome of the German elections in September is the fourth risk on the UBS list. “What if Angela Merkel were no longer Chancellor after the elections?” Larry Hatheway asks in a provocative way. One of the options is a grand coalition. “The Social Democrats (SPD) might agree to join that coalition with Merkel’s Christian Democrats, but without her at the head of the government”, he goes on. Though she will probably be re-elected Chancellor, there is a certain level of uncertainty until Election Day and it is clear that markets don’t like uncertainty, he concludes.

      Chinese growth is expected to be around 8% this year and also in 2014. This is not the return to double-digit growth but it is not the hard landing that some people feared. “Most of what we see, whether it is credit growth, property data or data on durables like auto sales, suggests  that the Chinese economy is actually accelerating faster than the consensus of capital markets and policy makers anticipated”, Larry Hatheway explains.

      On the downside, there is the risk of territorial disputes with countries like Japan, Vietnam and the Philippines. “Anything could happen, but we don’t expect these disputes to escalate to military conflicts”, he thinks.

      There are many sources of conflict between the US and China, the world’s largest economies; the currency war and cyber terrorism are on top of everybody’s list. But Larry Hatheway nuances further by stating: “On the other hand, the best thing that has happened since the Great Recession, in my mind, is how little protectionism there has been. Let’s look at it from the perspective of the US: if you want to be president of the United States, you need to spend at least one billion dollars just campaigning. You get that money from prominent individuals and groups like Wall Street, Silicon Valley, Hollywood and the energy sector. Those are highly globalised entities”.

      The message from the UBS expert is unambiguous: If a politician in the States aspires to the presidency, he will realise where most of his funding is going to come from. These groups want access to and a good economic relationship with China. CW