World Economy

Political Uncertainty and a Fragile World Economy

Lenders and investors are more cautious, governments are more heavily indebted and central banks are still wrestling with unconventional monetary policy
Advanced and emerging economies are settling into a pattern of growth that’s disappointing by historical standards.  Advanced and emerging economies are settling into a pattern of growth that’s disappointing by historical standards.

The global economy is gathering momentum, the International Monetary Fund has declared. That's probably correct and undeniably encouraging, but there's an ominous discord between this economic expansion and what's euphemistically called "political uncertainty"—that is, the stresses caused by surging anti-trade, anti-market and anti-immigrant populism.

This "uncertainty" could be the prelude to some seriously bad policies, enough to derail one or more leading economies and stall the global expansion. And there's another danger, less obvious but no less important: the prospect of chronic underperformance. Even if the new politics doesn't bring the ceiling down, it threatens to block the longer-term policies that would promote growth, Bloomberg reported.

The current expansion is steady but unspectacular. The IMF's new forecasts say global output will rise by between 3% and 4% this year and next—slightly better than in 2016. So far, investors haven't taken fright over US President Donald Trump's anti-market rhetoric, or the implications of Brexit for the UK and the European Union, or any of the other new sources of global instability. That could change in an instant, of course.

Yet even if all goes well, there's a problem. Advanced and emerging economies are settling into a pattern of growth that's disappointing by historical standards. This shortfall means persistent poverty, diminished opportunities and stagnant incomes for hundreds of millions of people. It helps explain the current state of politics.

This longer-term slowdown is starting to look permanent. Growth in productivity had already weakened in many advanced economies—under pressure from demographic trends, fewer breakthrough innovations and other forces. Then came the crash. Roughly a decade later, economies still haven't shaken it off. Lenders and investors are more cautious; governments are more heavily indebted; and central banks are still wrestling with unconventional monetary policy.

Smart economic policy can still help increase long-term growth—but it requires deliberate intelligent action of the kind that the new politics makes far more difficult.

Patience and Populism

There are no quick fixes. Promote innovation. Add to human capital by improving schools and widening access to higher education. Create programs that help workers relocate across regions and industries. Build well-chosen infrastructure. Encourage competition. All these things take years to yield benefits. Patience is the watchword—and populism is, above all, impatient.

One more thing. Persistent tepid growth is especially difficult for central banks, because it implies correspondingly low interest rates. In the US, the normal interest rate—the one expected to prevail at full employment—used to be roughly 4%. Today it might be 2% or less. This means the Federal Reserve will have less room to cut interest rates when the next recession hits. It makes macroeconomic stability harder to achieve. The same logic applies in most other advanced economies.

In the future, either central banks will have to resort to unconventional measures more often or fiscal policy will have to shoulder more of the burden of managing aggregate demand. In either case, economies will have greater need of competent policy makers, trusted by voters and insulated from the turbulence of daily politics. Again, populism pushes the other way.

It's good that the global economy is gathering momentum. But with politics this broken, don't expect miracles.

Fear of Americans

Although the Republican sweep of the White House and both chambers of Congress in November have gotten a lot of credit for the stock rally that followed, a significant number of Americans think those same politicians are the biggest threat the economy faces over the next six months, NBC News reported.

According to a new survey by, "the political environment in Washington" was labeled the top economic threat by 38% of respondents. While just 28% of Republicans said the political climate is our greatest near-term economic threat, 52% of Democrats said the same. "We can imagine that Democrats are concerned about the possibilities of a Republican-led Congress and Donald Trump," said Mark Hamrick, Bankrate's senior economic analyst.

Bankrate found a split along income and educational attainment lines, as well: While 56% of Americans with a college degree say politics pose the biggest economic threat, just 22% of those with a high school education or less do.


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