Global Market Watch: Political Uncertainty Remains the X-Factor

At the beginning of the year, rising political risk was looming over a fairly bullish underlying macroeconomic backdrop. Yet, overall, politics has turned out to be quite growth supportive. The latest political event was Germany’s parliamentary elections, but the political calendar has a few more potential market-moving events on tap. In Japan, Prime Minister Shinzo Abe called snap elections to exploit the opposition party’s disarray and renew his own mandate. And EU heads of state are set to convene for the union’s biannual European Council meeting, at which members are likely to decide whether the Brexit negotiations can move to trade talks.  

The return of Angela Merkel as German chancellor for a record-breaking fourth term was never in doubt. Her center-right Christian Democratic Union (CDU) remained the strongest political party. Nonetheless, she faced the same populist challenge that has disrupted the political establishment in many developed-country elections in the past twelve months. Merkel now has to forge a coalition with the pro-business Free Democratic Party (FDP) and the Greens. Given the ideological difference between the three parties, it may well take until Christmas before the EU’s largest and politically most dominant country has a new government. However, the outcome could likely be a more growth supportive fiscal policy with tax cuts and more infrastructure spending that could boost eurozone growth in 2018.

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