2013: the year ahead

### United States – Dawnesh Mistry

Late on 1st January, Congress passed an earlier Senate approved agreement on the Fiscal Cliff, averting automatic tax rises of $536bn and spending cuts of $109bn. The deal raises taxes from 35 to 39.6 per cent for families and individuals earning above $400,000. This austerity will slow the US economy, albeit not to the extent that going over the cliff would have, with some tax rises i.e. capital gains, may weaken risk-appetite in the long-run. Moreover, the deal does not address the long-term trajectory of debt, failing to reform entitlements or spending cuts. By March the US will reach both, its debt ceiling, and the deadline for a decision on cuts. In the next two months we can expect another round of negotiations, more uncertainty and ultimately, a further weakening of investor confidence. Amid slowing net exports and a slowing business investment, Americans may become increasingly reliant on the Fed. Its QE program is likely to support the one positive in the US economy however: rising house prices. While recession, and consequently significant pain for the rest of the world’s economies has been avoided for now, 2013 will not be without its dangers.

### Egypt – Jenn Ljunqvist

Egypt’s 2012 did not pan out quite as hoped; now 2013 brings its fresh wave of challenges. Egyptians are due to vote yet again in about two months, but following civil unrest, low turnout in the December referendum and widescale criticism of Morsi’s temporary hijacking of judicial powers, the prospect of the Freedom and Justice Party repeating 2012’s electoral landslide seems slim. Meanwhile, the opposition will continue to fight the new constitution on its failure to protect religious minorities, women and freedom of expression. A democracy or theocracy debate will rage on as pro-Morsi supporters erode press freedoms – satirist Bassem Youssef lies accused of “undermining the standing” of Morsi, and three others are held for treason, accused of inciting supporters to topple the Muslim Brotherhood leader. But its crippled economy will bring all into sharp relief as Egypt combats 9 per cent inflation, its pound languishes in an eight-year low against the Dollar and an crucial £3bn IMF loan hangs in the balance. Political deadlock between Islamic groups and the National Salvation Front underlines yet a further obstacle on the road to recovery in a 2013 that lays bare a nation riven with divisions. Plus ça change…

### Japan – Demetris Pachnis

In December, Japan elected Shinzo Abe prime minister in a sweeping victory for the Liberal Democratic Party (LDP) with a mandate to reflate the world’s third largest economy through aggressive monetary easing and increased government spending. For a nation that has been plagued by two decades of low growth since its property crash in 1990, these policies had resounding appeal. Nonetheless, Japan lies in a precarious position. It has the largest debt-to-GDP ratio in the world attributable to 21 years of back-to-back budget deficits, and this year is projected to reach 226.8 per cent of GDP. Yet despite Japan’s fiscal imbalances, the markets remain unfazed over ostensibly “unsustainable” levels of public debt. Financing such debt on the cheap has exacerbated its excessive debt burden. The government’s reflationary rhetoric thus disconcerts many. Inflation erodes savings and sees investors seek higher returns. Exports have furthermore deteriorated, losing out to leaner trading partners – its current account is set to be in deficit by 2015. While imminent the threat is not, Japan’s path is unsustainable. Voters must hope the LDP has learnt past lessons, otherwise 2013 will prove to be another of the low-growth, low-resolution days of yore.

### Israel-Palestine – Alexander Bunzl

2012’s Hamas-Israel ceasefire, the UN’s upgrade of Palestine’s membership status and US involvement suggested progress. History tells us otherwise. Indeed 2013’s leaders will remain Israel’s Benjamin Netanyahu, set to win January’s general election, and Palestine’s Mahmoud Abbas. Netanyahu will persist in calling for negotiations to achieve a Two State Solution and Abbas will refuse, citing Israeli settlements. Netanyahu will nevertheless remind Abbas that the Palestine Authority refused to co-operate even when settlement construction was frozen for ten months. As for America’s mediating, Obama has less reason to care than before the election, distracted by ‘American issues’, such as unemployment and the deficit and ‘world issues’, such as Iran. Abbas crucially has no authority over Gaza. The recent fighting between Israel and Hamas is but a publicised part of the conflict. For years, Hamas militants have fired rockets into Israel, which has responded forcefully to the attacks. The latest ceasefire will be broken and both sides will find reason to take up their roles. Is there hope for a lasting resolution in 2013? Not a chance, unless negotiating or ‘negotiating about negotiating’ convenes.

### United Kingdom – Georgia Harris

As 2013 kicks off with the January sales, a bounce-back in the UK retail industry may be on the cards with upcoming reports hinting a strong Christmas trading period. Early signs show a promising start to the year, with Next, a high street chain reporting a 3.9 per cent boost to sales in December. It seems altogether unlikely however, that the better retail performance will stave off further bankruptcies, as consumers are still hold back on spending despite the ease in inflation late on in 2012. With average earnings rising at a rate of 1.7 per cent over 2012 – despite 2.7 per cent inflation and house prices slipping 1 per cent over the year – it is not difficult to see why consumers may be reluctant to go on sale spending sprees. With a survey by Markit, a financial information researcher showing that 43 per cent of households expect their finances to worsen in 2013, Osborne’s warnings of no kinder austerity measures in 2013 provide little relief for consumers. A chance for better UK growth may nonetheless come from improved US and Eurozone performance: so perhaps better to sit back and hope the rest of the world sorts itself out.