After Greece’s poll: What leaders need to watch next

After Greece’s poll: What leaders need to watch next

Global markets are again breathing a sigh of relief after the weekend’s Greek election, with the pro-Euro New Democracy party claiming victory and promising to stay in the euro zone and proceed with the Greek bailout.

It’s a circuit-breaker for global financial markets, with the Australian market up 1.5% today and overseas markets expected to rise tonight.

Of course, the Greek poll doesn’t mean the crisis in Europe is over and leaders still need to watch the global economy carefully.

Here are other global signals that Australian leaders should be watching closely in the coming months:

  1. 1. The developing Greek situation

Greece affects our trading partners, so it’s worth quickly looking at what happened.

The weekend’s elections gave New Democracy (Greece’s main centre-right party) 30.1% of the vote. Syriza, a coalition of radical left-wing groups, came a close second with 26.5% of the vote, while PASOK, which before the euro crisis was Greece’s main centre-left party, scored 12.5%.

New Democracy and PASOK ran on a pro-bailout platform, and are expected to try to form a coalition government headed by New Democracy leader Antonis Samaras. Under a quirk of the Greek constitution, the ruling party gets a further 50 seats, which means that should New Democracy and PASOK form a coalition they will control 161 seats in the 300 seat Parliament.

  1. 2. China

This is good news for China, Australia’s biggest trading partner.

“Asia and China’s outlook would have been far worse if Greece had voted overwhelming for Syriza and the other anti-bailout parties,” says Shane Oliver, chief economist and head of investment strategies at AMP Capital Markets.

“If Greek had a disorderly default on its debt, it would have knocked Europe into a deep recession. At least that scenario, for now, seems to have been headed off.”

A Greek recession would have hit China by depriving it of a key export market. For now, that seems to have been averted, but few would take comfort from China’s current situation.

“In Asia, there’s clear evidence of a slowdown,” Oliver says. “China was growing at 12%, now they’re at 8%, and in current quarter have slowed even further to 7.5%.”

But at least China’s slowdown has been caused more by monetary tightening than European concerns. This means it’s easier to address.

“A lot of the slowdown has to do with an inflation scare a year ago which resulted in monetary tightening,” Oliver explains. “With inflation coming under control, there’s plenty of flexibility to stimulate the economy.”

The greatest fear of many Australian industries – a hard landing in China – is looking less likely.

  1. 3. The US

In America, fears of a double-dip recession have largely subsided.

“It’s muddling along with 1.5-2% growth,” Oliver says. “It’s a fragile sort of recovery, prone to occasionally setbacks, and we’re going through a soft patch at the moment.”

“But at least the Federal Reserve is committed to keeping the recovery going.”

The Federal Reserve is meeting next week, when it is widely expected to opt for more monetary stimulus.

  1. 4. Japan

And Japan? It’s in better shape than last year, if that’s any comfort.

“Last year Japan was in the midst of a recession, that was made worse by the earthquake and tsunami,” Oliver says. “When you cut through the distortions, it’s growing at 1%, which is a modest, restrained growth, but at least its growth.”

  1. 5. Australian developments – the dollar and the RBA

The RBA has been acting notably more dovish in recent months, posting several rate cuts, with most commentators expecting more are on the way.

This is a marked change from last year, when the RBA was threatening to raise rates to tackle the spectre of inflation.

In a slight boost to exporters, the dollar isn’t as high as it once was, buying $US1.01 today.

“The Australian dollar is still pretty high, but at least it isn’t buying $US1.10 like it was last year,” Oliver says.

Leaders in trade exposed industries will need to continue to plan for a strong Australian dollar and carefully negotiate the structural change that brings.

  1. 6. The rest of Europe

Of course, Europe isn’t in the clear yet. Even Greece isn’t in for smooth sailing.

“Greece is way behind in meeting its bailout targets,” Oliver says. “The country is divided, with the two expected ruling parties together receiving less than 50% of the vote. A big chunk of the vote went to far-left parties. That division means ongoing protests.”

“Spain has problems; Portugal has issues, as do Italy and Ireland. The European crisis is far from over.”

“But there’s a bit more confidence now that recession will be mild rather than deep.”

Oliver believes the Europeans are likely to opt for more monetary stimulus. EU leaders are meeting for a summit next week to try to address the problems in Spain and elsewhere.

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