Ask any finance minister or central banker about leading risks to the global economy and you’ll get one giant worry from everyone: politics.
From U.S. elections to Britain’s exit from the European Union to China’s shaky overhaul, top economic officials around the world are growing increasingly anxious about politics maiming global growth by propelling antitrade sentiment, suppressing investment and fueling market volatility.
Some populist leaders are capitalizing on disaffected voters to revive protectionist policies seen after downturns since the 1930s. And uncertain outcomes of a slew of coming elections, referendums and leadership reshuffles already appear to be damping business activity across the globe.
Uncertainty about where politicians will drive economic policy in the coming years dominated concerns among the world’s finance ministers and central bankers gathered here in recent days for semiannual meetings of the International Monetary Fund and the World Bank.
“The uncertainties and risks facing the world economy have increased as some major economies have entered the general-election season,” said China’s finance minister, Lou Jiwei, this year’s chairman of the Group of 20 leading economies.
Political challenges risk pushing the global economy off the rails in a world of record debt, vulnerable banks and anemic growth. Top policy makers say a weak global economy, already blamed for creating the political environment that is reviving protectionism, could face a reversal of a half-century of global trade integration.
“Too many politicians are backing trade barriers in a misguided effort to boost national growth in the short term,” said Roberto Azevedo, director general of the World Trade Organization. “The medicine that is being often prescribed is protectionism, and that is exactly the kind of medicine that is going to hurt the patient, not help him.”
The IMF warns a dangerous cycle could develop: More weak growth engendered by protectionism could fuel a stronger backlash against trade that would further depress output. Officials from around the world have voiced deep worries about the trend already emerging.
“When the world’s large economies debate protectionism, I think it doesn’t all go well for the world,” said India’s finance minister, Arun Jaitley.
Trying to estimate the potential impact, the IMF calculates a sharp rise in tariffs and other trade barriers could raise import prices globally by 10%. That would translate into a 15% fall in exports over the next five years. Consumption would drop by 2%, and global economic growth would take a nearly 2-percentage-point downgrade, it said. Such a decline would push the global economy below a level some economists consider a technical recession.
The IMF’s worst-case scenario is even more sobering. Financial markets could react negatively to a surge in protectionism. The combination could trigger an 18% decline in investment in some countries, and output around the world would fall between 3 and 6 percentage points. Many countries would enter into deflation, the fund said.
Market volatility is rising alongside the uncertainty, according to indexes measuring both. Policy uncertainty is hitting levels not seen since the global financial crisis and Europe’s sovereign debt woes. Market volatility is mimicking its rise.
Investors are rattled about the U.K.’s exit from the EU, seeing the rocky divorce over the next three years as one of the biggest threats to the region.
French and German elections are raising questions about the future of economic policy in two of the world’s largest economies as right-wing parties gain traction. Italy faces a constitutional referendum in December that many economists say is critical to a restructuring of its economy.
Evidence of anxiety hitting investment has popped up in the eurozone purchasing managers index, a gauge of business activity. In September, the index hit levels not seen since 2014 as firms defer spending.
U.S. politics are hitting Mexico’s economy, too. The peso has moved sharply in an inverse relationship to Republican nominee Donald Trump’s political fortunes. With roughly 80% of Mexico’s exports to the U.S. contributing to one-third of the country’s output, Mr. Trump’s threats of punitive tariffs are blamed for souring consumer confidence in the country.
Investors also are watching China cautiously. Beijing is slow-walking long-promised plans to liberalize its economy until after a leadership reshuffle that starts next year. That delay is fueling a dangerous buildup of credit and excess industrial production capacity that is weighing on global commodity prices. Failure to pick up the pace of reform, the IMF warns, could lead to a financial meltdown and a nose dive in growth in the world’s second-largest economy.
While political concerns center on major economies, worries extend across the globe. Colombians this month rejected a peace deal with rebel fighters, a vote that could jeopardize that nation’s long-term economic health. Nigeria’s government, trying to cope with the loss of revenue after oil prices fell, is suing several major firms for what officials claim is nearly $13 billion in illegally exported crude.
“You’ve got a lot of firms sitting on a lot of cash,” said Federal Reserve Vice Chairman Stanley Fischer. “There’s a sort of air of uncertainty about the situation that I think is not encouraging investment.”