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cash. Second, plenty of controversy sur-

rounds the appropriate path towards fis- cal consolidation. In its World Economic Outlook report – heatedly debated at the meetings – the IMF concluded that fis- cal multipliers are larger than hitherto assumed. Up to now, the rule of thumb had been that a 1 percentage point change in a country's structural budget balance would change growth by 0.5 percentage points. Te latest report suggests that the effect could be much larger, around 0.9- 1.7 percentage points. In other words, fiscal retrenchment cuts growth by more than anticipated. Te findings were seized upon by

opponents to austerity. IMF Managing Director Christine Lagarde and German Finance Minister Wolfgang Schaeuble discussed the topic publicly (though in a perhaps more civil manner than portrayed by the international media). Lagarde took a more lenient approach to the issue, pointing to the desirability of pacing fiscal retrenchment to avoid harming growth, while Schaeuble insisted on adherence to a strict timetable. Te issue isn't resolved. Tird, politics is now the main risk.

While global growth may have started to stabilize at a below-trend pace, worries persist that policy uncertainty and indeci- sion could make matters worse. Te fis- cal cliff will presumably not be addressed until after the US presidential and con- gressional elections on November 6, leav- ing precious little time to avert a growth shock in the first quarter. A crucial EU summit was held on

October 18-19. Te agenda was hugely ambitious, including discussions over banking supervision, legacy debt treat- ment, steps towards fiscal integration and the growth compact. Substantive progress might be hard to achieve with still widely divergent objectives among member states. And again, it's not just the West

that's fumbling along. In China, the Communist Party will hold its congress on November 8. However, this will not complete the transition process, which will last until March 2013 when the top government posts change hands. Markets appear hopeful that greater clarity about China's reform process and, in tandem, the intended stimulus measures, will arrive shortly after the party congress. But it may take a little longer for the fog to lift and visibility to improve. Politics in Japan is stuck as well. Te

Growth may have started to stabilize, but it is too fragile to withstand policy missteps in the world's leading economies

government appears ready to call an elec- tion in the coming months, suggesting that major policy changes will be put off for quite some time, including additional fiscal support for the economy. What's more, polls currently indicate that the incoming government, likely led by the opposition Liberal Democratic Party, may not command a large enough major- ity to adopt decisive reforms. Te fourth quarter, in short, is all

about political risk. Growth may have started to stabilize, but it is too fragile to withstand policy missteps in the world's leading economies. For what it's worth, we still think that China at least will start to fire up again early next year. But that assumes that the political transition pro- ceeds smoothly and important decisions aren't delayed. In addition, we think that investors

still underestimate the impact of renewed monetary easing on emerging markets. Te money train has left the station and emerging market assets are the next stop. Curiously, few people in Tokyo talked about the damage that waves of easy liquidity can ultimately do to financial stability in parts of Asia. Perhaps it's too early to talk about this.

But, if politics in the next few months doesn't derail the global economy alto- gether, we suspect that at an annual meet- ing in the not-too-distant future that is precisely the topic that will need to be discussed.

Frederic Neumann

is co-head of Asian

Economics at HSBC Global

Research China Economic Review • November 2012 19

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