In this Update, we take stock of the key elections that are scheduled around the world in the coming year and discuss the implications for economic policy. While elections in advanced economies are unlikely to produce any decisive changes in direction, there are a few to keep an eye on in the emerging world.
- In this Update, we take stock of the key elections that are scheduled around the world in the coming year and discuss the implications for economic policy. While elections in advanced economies are unlikely to produce any decisive changes in direction, there are a few to keep an eye on in the emerging world.
- Table 1 gives a summary of notable elections in 2021. While last year’s US elections were covered by economic commentators with much fanfare, we suspect that fewer column inches will be devoted to this year’s scheduled elections in DMs, most of which are in Europe. If the polls are anything to go by, moderate parties should remain in power, precluding any big shifts in fiscal policy, reform agendas, or foreign relations that could have macroeconomic or financial market consequences.
- Angela Merkel’s looming departure as German chancellor will be of historical significance but is unlikely to have major consequences for economic policy in Germany or for the EU. With Merkel’s centre-right CDU/CSU comfortably ahead in the polls, the party is on course to remain the largest in the Bundestag. It’s still unknown who will run to succeed Merkel as chancellor in September’s elections. But none of the front-runners seem to mark a big enough break with the past to move the needle on fiscal or European policy. There is always a risk that a good showing of support for populists could influence the new chancellor’s thinking on Europe. But this risk has receded as the AfD party’s support has diminished over the past year.
- In the Netherlands and Norway, given that the structure of the political system provides even less scope for major swings in economic policy, we do not expect any significant changes. The rise in political tensions in the Netherlands over a child benefits scandal – which led to the early resignation of the government – does not appear to have had a major impact on the current largest party’s popularity.
- In Japan, with the opposition parties still weak and none currently polling above 10%, the ruling LDP – the party of former PM Abe – is set to win another majority in the general election which must take place by October. PM Suga’s approval rating has fallen sharply in recent months so there’s no guarantee he will win September’s LDP leadership contest. But regardless of whether Suga hangs on to the office of Prime Minister, his party is likely to stay the course of “Abenomics”. We expect monetary policy to remain ultra-loose, modest fiscal tightening once virus conditions allow, and moderate progress on structural reforms.
- There is one curve ball in DMs, and that’s Italy. Just this week, PM Conte stepped down and the government fell apart over the handling of the pandemic and plans for spending funds Italy will receive from the EU’s new Recovery and Resilience Facility. We assume that a new coalition is formed without the need for an election and that, in the meantime, the ECB will keep Italian bond yields within a narrow band. However, if there is another election, polls suggest that it would produce a right-wing, eurosceptic coalition. Such a government would probably push for tax cuts and be more willing to clash with the EU over fiscal policy. But with the EU’s fiscal rules suspended, this risk would be unlikely to materialise for a few more years until after the worst of the pandemic had passed.
- Meanwhile, elections in the emerging world are more likely to cause changes in macro policy. In Latin American countries, anti-austerity sentiment has been growing, exacerbated by the economic fallout from the pandemic. As a result, we expect populists pushing loose fiscal policy to make headway. Given that Peru and Chile have solid sovereign balance sheets we do not expect it to be a major issue there. But greater fiscal spending could cause an adverse market reaction in Ecuador where, despite the grim fiscal position, the frontrunner wants to renegotiate the country’s IMF deal and boost public spending.
- In Czechia, with the incumbent ANO’s handling of the pandemic causing a drop in its popularity, significant fiscal support is likely to be kept in place. While this might not seem like a major shift in the current environment, the Czechs are typically more conservative with fiscal policy. Elsewhere in CEE economies, we expect no changes in Russian economic policy as United Russia is likely to continue to dominate.
- Other points to note are that there is a significant risk of violence overshadowing the general election in Ethiopia in June. Human rights abuses have already caused the withdrawal of some foreign aid and further violence could cause a further pull-back in investment which could cause external vulnerabilities to crystalise. And in India, a strong performance for Modi’s BJP in state elections may be enough to convince PM Modi that labour market liberalisation is not unviable and could lead to a ramping up of labour reforms.
Table 1: 2021 Elections Summary
Yoweri Museveni (NRM), incumbent for 35 years, is running for re-election. A crackdown on opposition parties has intensified in recent weeks and outbreak of violence is a key risk.
We expect no change to policy as the incumbent Marcelo Rebelo de Sousa won the Presidential election last week. One thing to flag, is that the far-right party, Chega, made headway in this election which could be a sign of things to come in the 2023 legislative election.
The Communist Party of Vietnam (CPV) will start its five-yearly leadership meeting in late January. The transfer of power is not expected to bring about any change in policy.
Presidential & Legislative
Close contest between conservative Guillermo Lasso (CREO-PSC) and leftist Andrés Arauz (FCS), who wants to renegotiate the existing IMF deal and increase public spending.
It does not appear that the recent child benefits scandal and subsequent political tensions will prevent the VDD from remaining the largest party in March’s election. As a result, we do not expect any major changes in policy.
Presidential & Legislative
Leading candidate for presidency is George Forsyth (VN), who belongs to a centre-right party. Centre-left candidate Julio Guzmán (PM) remains in the running.
Elections to be held in several major states. Strong performance for PM Modi’s BJP could convince ruling national party that labour market reform is no longer electorally unviable.
Election to take place against the backdrop of recent conflict between the federal government and separatists in the Tigray region. Flare-up of violence could cause further withdrawal of foreign aid and investment which would dent already-weak balance sheets.
Opinion polls suggest a victory for MORENA, led by incumbent President López Obrador. It promotes fiscal austerity and greater state involvement in the energy sector.
The election is a potential flashpoint but, with the new National Security Law chilling dissent, the likelihood of another round of disruptive mass protests has diminished. The cost of this stability will be the erosion of the city’s status as a global hub.
While the apparent frontrunner appears more Eurosceptic, in terms of domestic economic policy we do not expect any major policy changes.
With the centre-right CDU on track to remain the largest party and with the new leader, Laschet, set to continue Merkel’s centrist course, we do not expect any major changes to economic policy. The bigger implications may be for Germany’s policy towards the EU.
Election will largely focus on the government’s handling of the pandemic. Incumbent ANO has seen its popularity decline which may force the government to keep policy loose.
By 19th Sep.
United Russia likely to continue to dominate, no implications for policy.
PM Suga and the LDP look set to win the general election in October which will mean that Abenomics ends only in name.
Close contest between Frente de Todos and Juntos por el Cambio. Former is a coalition led by incumbent President Fernández and is split between centre-left and more radical factions. Latter is a centre-right coalition in power under President Macri (2015 – 2019).
Presidential & Legislative
Tight contest between several candidates including Daniel Jadue (PCCh), who favours more state intervention. Other candidates include right-wing Joaquin Lavin and Eveyln Matthei (UDI), who have both lost in previous presidential elections.
Sources: Various National Election Commissions, Capital Economics
Gabriella Dickens, Global Economist, email@example.com