Looking for Trouble

How politics could fuel downside risks to global markets

It is easy to find downside risks to the outlook for the global economy and markets. Worse still, a recent ING report, entitled ‘Looking For Trouble’, highlights doubts about the ability of economic policy to revive economic growth were a recession to strike. In a follow-up narrated presentation, I focus on the role that politics might play. In particular, there is potential for a damaging feedback loop between negative economic and financial market shocks and the rise of populist politics.

Looking for trouble PP20160427 10.08 - chart 3

An important part of the feedback loop between politics and economics comes through shifts in economic policy. Populists are challenging some or all of the neo-liberal orthodoxies on fiscal restraint, monetary laxity and trade and market liberalisation.

Looking for trouble PP20160427 10.08 - chart 2

Yet even if the mainstream politicians hold off the populist insurgency, it is worrying that policy-makers have failed to identify, or are unwilling to use, the necessary policy tools to counter a recession were it to strike. On the monetary front, doubts are growing as to how much further they could push on quantitative easing or negative interest rates. For now, mainstream politicians resist calls for more support from fiscal policy. But setbacks in the financial markets, or in the voting booths, may change this.

A significant downturn, even if milder than the ‘Great Recession’ of 2008-09, could open the door to yet another reappraisal of macro-economic policy. Politicians could revisit debt-financed public investment programmes, taking advantage of low or negative interest rates. Even ‘helicopter money’, whereby the stimulus is funded by newly-created money, could turn from theory into reality. While this may seem a long shot for 2017, more such radical moves are likely when the next downturn inevitably arrives.

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This entry was posted in Brexit, Economic Growth, Macro, Macroeconomics, Politics, US Election and tagged , , , , , , , , , . Bookmark the permalink.

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