WASHINGTON Dec 18 Political risks ranging from turmoil in Italy to potential impediments to euro area reform could hamper the world economy next year, a global banking group warned on Tuesday as it projected another year of sluggish growth.
In a somewhat gloomy forecast for 2013, the Institute of International Finance said fiscal policy in the United States and tensions between Japan and China could also weigh, although emerging economies should continue to improve.
The bank lobby group said it expected the global economy to grow just 2.7 percent next year, s carcely a pick-up from the modest 2.5 percent it sees for 2012. A year ago, it had predicted world growth of 3.7 percent for 2013.
"As we look at the outlook, you can't help but be disappointed," said Philip Suttle, the IIF's chief economist. "The global economy, specifically the mature economies, continue to disappoint us tremendously."
The IIF is the world's largest international lobbying group for financial firms. It was the lead negotiator for private sector creditors during Greece's private debt write-down earlier this year.
In its report, the group said uncertainty about elections in Italy could call into question structural reforms pushed by Prime Minister Mario Monti.
Monti has said he will resign after Italy passes its 2013 budget, leading to market fears about whether the next leader would stray from the path of austerity.
"Italian political uncertainty has the potential to lead to a flaring up of euro area tensions, including contagion to Spain," the IIF said.
That could lead Italy or Spain, the third- and fourth-largest economies in the euro zone, t o ask for a bailout, it warned.
Spain remains a risk on its own, Suttle said, as persistent high unemployment stokes social tensions.
The IIF also said upcoming elections in Germany could mean less progress on euro area reforms, as attention turns to domestic issues.
A leadership change in Japan could lead to a depreciation of the yen, the IIF said. Suttle said the substantial loss of Japanese nuclear capacity after the Fukushima disaster should have triggered a weaker yen already.
At the same time, leadership transitions in Japan and China could escalate tensions over ownership of islands in the East China Sea, with the potential to hamper trade.
However, the IIF expressed confidence that China would enjoy a year of robust growth, with other emerging economies also showing more strength.
It also said risks remain from budget negotiations in Washington, although it appears that President Barack Obama and congressional Republicans may be nearing a deal to avoid the so-called "fiscal cliff" at year end.
Economists warn that the $600 billion in spending cuts and expiring tax reductions set to kick at the start of next year could knock the economy into another recession if not tempered.
"It's looking to us as though compromise of the sort we've got in our forecast will be reached in the next couple of weeks, but who knows," Suttle said.
In a counterproposal to Republicans, Obama on Monday offered to set a $400,000 threshold for incomes that would face tax rate increases. Previously, he had insisted on setting the threshold at $250,000.
House of Representatives Speaker John Boehner, the lead negotiator for Republicans, has been seeking a level of $1 million. He said on Tuesday he was hopeful a deal is near.