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
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
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,
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
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
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