The economic cost of politics

Elections in particular are a key focus for both investors and economists with changes in leadership potentially affecting the outlook for a country, not just politically but economically.

Japan is a clear example of the effect political change can have, with the election in December of Liberal Democratic Party candidate Shinzo Abe as prime minister. He has already outlined his intentions to set inflation targets and introduce potentially more quantitative easing.

The effects of this policy are yet to be seen but the GDP forecasts for Japan remains steady at 0.7 per cent for 2013 and 0.8 per cent for 2014, suggesting a more positive outlook.

In the US the re-election of President Obama in November 2012 means he can concentrate on fixing the economy, although the last-minute fiscal cliff agreement and acceptance of sequestration spending cuts to be enacted on March 1 means there is some uncertainty as to how the US economy will perform in 2013.

Although the UK government is stable until 2015 (barring a collapse of the Tory-Liberal Democrat coalition) the annual Budget announcement is always a focus for investors with spending cuts or tax increases affecting markets.

Europe has also been the scene of political developments, with Greece and France holding elections in May 2012, while the resignation of Mario Monti as Italian prime minister in December 2012 triggered an election last month that ended in a split parliament.

Later in the year Germany will be in the spotlight as chancellor Angela Merkel looks to fight for her third term in office, although she suffered a setback in January as her coalition lost control of Lower Saxony in a regional election.

If Ms Merkel loses her seat, a change of power in Germany – Europe’s most successful and powerful economy – could affect the handling of the eurozone crisis and create more uncertainty.

In emerging markets, the death of Venezuelan leader Hugo Chavez will lead to presidential elections. If a pro-US leader is elected, this could improve relations and the outlook for the economy of the South American nation.

India, meanwhile, presented an annual budget on February 28 that outlined plans for increased funding for rural development projects but few measures to boost domestic and international investment, suggesting bigger reforms are being delayed until the run up to the next election in May 2014.

As we move into the second quarter of 2013 the drivers for growth and investment remain politically motivated, with leaders either seeking to placate the electorate in an effort to get re-elected or struggling to meet their own targets for growth and inflation.

In either situation, investors should be wary of what a political change could mean for their investment.

Nyree Stewart is deputy features editor at Investment Adviser