There are several hot spots that are likely to generate crises of one type or another during the year that will heighten investor uncertainty and roil the markets. Among them:
Washington. The fiscal cliff fiasco was just the overture. The real show is yet to come. The new Congress has to deal with a motion to raise the debt ceiling (the last one in 2011 led to a downgrade in the U.S. credit rating) and to cobble together a long-term deficit reduction plan. The bill that passed on New Year's Day was only a stop-gap measure which did nothing more than to postpone the problem for two months.
There is hope that the new Congress will be more amenable to compromise since several of the hardest-line Tea Party Republicans lost their House seats in the November election. But the reality is that the Republicans still have a majority in the House and many of them are adamantly opposed to tackling the budget crisis by raising taxes. The Democrats, for their part, don't want to slash cherished social programs, which is where the greatest potential savings are to be found.
As things stand right now, the federal government is the greatest single impediment to getting the U.S. economy back in gear. There has rarely been a time in history when American politicians inflicted such wrenching damage on their own country. In fact, you'd have to go all the way back to the Hoover Administration to find such a high level of incompetence. No wonder many Americans are fed up.
Unfortunately, we in Canada have to watch helplessly as our southern neighbour lurches from crisis to crisis, knowing that any economic harm caused by political gridlock will be reflected here.
Keep your fingers crossed that the new Congress will display more good sense and leadership. But don't bet on it.
Europe. This is another long and tiring saga. However, 2013 may bring some sort of resolution which would be welcomed by all. The European Central Bank (ECB), under the leadership of Mario Draghi, has emerged as a strong and powerful force in damping down the fiscal crunch faced by southern tier countries and strengthening the euro.
In a statement on Dec. 17 to the Committee on Economic and Monetary Affairs of the European Parliament, Mr. Draghi set two priorities for 2013. The first is to improve the functioning of the economic union so as to avoid excessive destabilizing imbalances within the euro area. "This must not be allowed to happen again," he said firmly.
The goal is to restore competitiveness between the member states and ensure the smooth functioning of product and labour markets. However, this is not something the ECB can achieve on its own. It will require political action on the part of the member governments. The results of upcoming elections in Italy and Germany will go a long way to determining whether this is a feasible goal.
The ECB president's second priority is the completion of the financial union with the establishment of a mechanism to ensure the orderly wind-down of non-viable banks in such a way that their closure does not cause widespread financial disruption. That too will be a tall order, but one that seems more achievable now than it did a year ago.
Israel/Iran. This may be the year when the simmering tension between Israel and Iran boils over and becomes a major international crisis. Israel is heading into an election from which Prime Minister Benjamin Netanyahu is expected to emerge with a new mandate. He has been outspoken in his condemnation of Iran's nuclear program and the threat he perceives it poses to Israel. He's even set a timetable for dealing with it: in a September speech to the United Nations he said Iran's ability to enrich uranium must be stopped by spring or early summer at the latest or the country will be in a position to make an atomic bomb.
Iran has always insisted that its nuclear program is for peaceful purposes only but virtually no one in Israel (or in most other countries for that matter) believes it. An Israeli pre-emptive strike against Iranian facilities, with or without U.S. approval, is a genuine possibility. If it happens, it would likely unleash a broader conflict in the Middle East that would threaten world oil supplies and have unpredictable consequences.
Syria. This is another Middle East flashpoint. The brutal civil war has not had any discernable effect on the global economy or stock markets to this point but if it should spread that situation could change.
China. So far, the signs that China is engineering a soft landing are encouraging. The slowdown in Chinese GDP growth was a major worry in 2012 and the downward pressure that created on commodity prices directly affected Canada's growth and our stock market.
If China's momentum picks up in 2013, that will be a positive sign for everyone and could go part way to offsetting the on-going mess in Washington as far as Canada is concerned.
The unknown. There is always the risk that some totally unexpected event can have a major effect on the global economy and markets. The 2011 Japanese earthquake, tsunami, and subsequent nuclear crisis is a classic example. Fortunately, there was nothing of that magnitude in 2012 but this type of "black swan event" could happen at any time. North Korea, Pakistan, and Mali are three potential flashpoints to keep an eye on.
Put it all together and it is shaping up to be a turbulent year. But then, what else is new? It's the way things are these days.