GRI’s Weekly Risk Outlook

GRI’s Weekly Risk Outlook
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Nuclear talks with Iran continue as deadlines loom. The Fed meets to discuss increases in interest rates. Israeli Prime Minister Netanyahu faces reelection hiccups. China and Japan head for a prospective détente with mutual security talks, and British Chancellor Osbourne releases national budget to maintain support. All in this week’s GRI Risk Outlook.

Nuclear Talks to Continue Between Iran and World Powers as Deadline Approaches

Iranian Foreign Minister Mohammad Zarif will meet today with his French, German and UK counterparts in Brussels before talks resume for 5 days in Lausanne, Switzerland to complete a nuclear deal.

Potential for an Iranian nuclear deal has received considerable attention in the United States of late, as Prime Minister Netanyahu delivered a forceful speech to the U.S. Congress that it would be better to have no deal than this deal.

In the wake of Netanyahu’s speech, an open letter from 47 Republican Senators was sent to the Iranian government last week intimating that any deal reached could be undone by the next president. This move was met with immediate outrage from across the political spectrum, and has contributed to a significant shift in the internal politics of sanctions against Iran.

Although further sanctions would still likely receive majority support in both houses of Congress, the letter has increasingly polarized the issue, and it now appears less likely that enough Senators could be convinced to override a likely presidential veto.

As a result, the ongoing nuclear negotiations appear to have gained some breathing room from the United States.

U.S. Federal Reserve Meets to Discuss Interest Rates

On Wednesday, the Federal Reserve’s Federal Open Market Committee will meet to discuss economic trends and in particular the timing of raising U.S. interest rates.

Current speculation places action by the Federal Reserve on interest rates as occurring as early as June, with the Federal Reserve signaling its willingness to change policy by removing phrasing from the Fed’s policy statement that it would be “patient” before raising interest rates.

The raising of U.S. interest rates comes at an interesting time. While the U.S. economy shows signs of improvement, economies across the globe are continue to struggle.

In the past month, central banks in Russia, Turkey, Australia, South Korea, Thailand, China and India cut their interest rates, signaling a broad effort to ease economic pressures (a full list of the 23 latest central bank interest rate cuts can be read here).

There have been pressures from Congressional Democrats to hold off on rising interest rates until unemployment falls further, though Yellen has indicated that 5.5% represents a comfortable unemployment level to consider raising interest rates.

National Elections in Israel Could Topple Netanyahu

On Tuesday, Israeli voters will go to the polls to determine the makeup of the 12th Knesset, and with it their next Prime Minister.

Polls have shown a considerable tightening between the center-right coalition-led by Prime Minister Netanyahu’s Likud Party, and the center-left Zionist Union led by Yitzhak Herzog’s Labor Party and Tzipi Livni’s centrist Hatnua.

The campaign has largely centered around economic and security concerns. Traditionally, the center-left has maintained a slight advantage on economic issues, with the right dominating the security space.

However, the dynamics of the campaign have recently changed: economic issues have become increasingly prevalent as housing prices have sky-rocketed and food prices remain high. Prime Minister Netanyahu has been criticized in some quarters for actually reducing Israeli security by antagonizing U.S. President Obama and failing to put forward a realistic plan to achieve peace.

Recent polls have put Herzog’s Union at 26 seats and Likud at 20, making coalition-building a necessary requisite for the 120-member body. Center-right political parties have generally found such a task easier, and Herzog would have to figure out a way to effectively cobble together the interests of the Zionist Union, the Arab-Israeli joint ticket (which is projected to win about 13 seats), and likely two centrist parties.

Should Herzog and Livni emerge victorious following the election, relations between the United States and Israel will likely improve, though it is uncertain what effect (if any) this would have on the Iran-P5+1 nuclear deal.

China-Japan Hold Security Talks for the First Time in Four Years

Japan’s Deputy Foreign Minister Shinsuke Sugiyama will meet with China’s Assistant Foreign Minister Liu Jianchao in Tokyo.

Relations between the two economic superpowers reached a low point in 2012 when Japan effectively nationalized the disputed Senkaku/Diaoyu island chain by purchasing three of the five disputed islands.

The two countries have moved to make amends, with a very awkward meeting of the two leaders in November 2014. However much this visit illustrates the two countries convergence on security and foreign affairs, Japan and China still seem to be diverging on larger economic policy issues.

Japan was the last country to join the free trade Trans-Pacific Partnership negotiations in 2012, which excludes China but includes the United States, Canada, Australia, and New Zealand.

Meanwhile, China has decided to pursue a parallel free trade route with the Regional Comprehensive Economic Partnership, RCEP, which in theory would link the ASEAN countries and their free trade partners (notably China).

Although Japan could technically be a member of both RCEP and TPP, China has largely led the way on RCEP without considerable interest from Japan.

Additionally, China’s establishment of the Asian Infrastructure Investment Bank, AIIB (which last week received the support of the United Kingdom, to the chagrin of the United States) has been regarded by analysts to be a direct opponent of the World Bank and Asian Development Bank, which are viewed to be effectively run by the United States and Japan, respectively.

British Chancellor Releases Budget, Hoping to Maintain Support Before Elections

On Wednesday, UK Chancellor of the Exchequer George Osborne will release the final budget of the Conservative-Liberal Democrat Coalition government before parliamentary elections on May 7.

Labour Party leaders have already indicated that a vote to reelect the Conservatives in May would lead to significant reductions in social services, and this budget could provide the Labour Party with further talking points.

In previous election years, governments have sought to provide “giveaways” to strengthen electoral prospects, though this appears to be a more difficult now given Chancellor Osborne’s previous commitments to stay within fiscally responsible means. However, his announcement in the last budget liberalizing spending for pensioners took many by surprise, and he may announce a “game changer” in this budget too (one policy that appears likely would provide relief to North Sea oil producers, who have shed jobs in response to the collapse in global oil prices).

Regardless of the budget outcome, the May 7 elections are shaping up to be extremely interesting: the Liberal Democrats are projected to lose half their seats, the Scottish National Party could emerge as the 3rd largest political party in the UK Parliament (possibly securing as much as 56 of Scotland’s 59 seats, and dealing a severe blow to Labour’s chances of a clean victory). UKIP, the Greens, and Plaid Cymru have a decent shot of increasing vote share and parliamentary representation.

Wednesday’s Osborne budget will be the last major policy chance for the Coalition Government to make the case that they deserve reelection in 8 weeks’ time.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes. 

The Weekly Risk Outlook is written by GRI analyst Brian Daigle. 

Categories: Politics, The Week Ahead

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