The populist threat to growth

Populism is an emotive topic on both sides of the political spectrum. 

It can embrace right- or left-wing beliefs, but what it always does is divide people into opposing sides – a virtuous “us” and an elitist or threatening “them”. 

Populist leaders seek to address the perceived wrongs inflicted on “us” with economic and social policies that will overturn an established norm. 

Populists do not share the same agenda – some are business and market-friendly, while others are not. 

But, generally, they oppose globalisation and the free movement of goods, services and jobs; promote national interests at the expense of multinational organisations; and are against both immigration and foreign ownership of domestic assets.  

Whether one embraces these views or not, there is no denying that support for populist political parties has exploded across the world, propelling leaders like President Donald Trump in the US, Rodrigo Duterte in the Philippines, and Jair Bolsonaro in Brazil to power in the last two years. 

Populists are gaining ground in many European countries – notably Austria, Finland, Hungary and Poland, and were responsible for the Brexit vote in the UK. 

According to Bridgewater Associates, one of the world’s largest hedge funds, support for populism is the highest since the 1930s. 

Most believe that the trend has been fuelled by growing income inequality, and resentment triggered by the global financial crisis ten years ago.

What this means today is that populism is having an impact on global economies and markets, with implications that must be understood by investors. 

The trouble is, those implications are not entirely clear.

Critics believe that ultimately populism will curb global growth, hit financial markets, and hurt both business and employment. 

But so far, this has not been the case – the short-term effects of populist policies have been to boost growth, particularly in the US. 

Since Trump was elected, the US economy has been growing at more than 3%; business confidence has soared; consumer confidence is at a 14-year peak; and unemployment is at a 50-year low. 

Much of that can be attributed to his sweeping tax cuts, which reduced the corporate tax rate from 35% to 21%, along with the dismantling of regulations, particularly those aimed at protecting the environment.

But the cracks are starting to show. 

At the end of October, US stocks plunged, wiping out the last of this year’s substantial gains on concerns about a global economic slowdown, prompted by deepening trade hostilities between the US and China. 

Worries about rising US interest rates, aimed at curbing inflation fanned by faster growth, was also a factor.

So far, the US has slapped tariffs on $250bn worth of Chinese products and has threatened to do the same to another $267bn in early December. 

In response, China has set tariffs on $110bn of US goods and is threatening measures which would hurt US businesses in the country.

The damage inflicted on the world’s biggest two economies will spill over into others as supply chains are disrupted, and on 8 October the International Monetary Fund cut its growth forecasts for the global economy to 3.7% (from 3.9%) for 2018 and 2019. 

It's growth forecast in global trade flows was cut to 4.2% for this year, and 4% for 2019 (from 4.8% and 4.5%). 

The Trump administration has insisted that price increases triggered by import tariffs won't hurt American consumers, but business groups have started to warn that their profits, and consequently jobs, will suffer.

Ironically, soya bean farmers in the US rural base who voted overwhelmingly for Trump are being hit hard as soya – a rare success story in the US farming market – is affected by Chinese tariffs. 

Many economists believe US inflation will climb as a result of the trade tariffs and tax cuts – and are alarmed by the country’s ballooning debt, which surged by more than $1.2tr to a record $21.5tr in the fiscal year to end-September, largely due to the Trump administration’s boost to federal spending, a hallmark of populist policy. 

Critics of the global populist trend also say that anti-trade and anti-immigration policies are inflationary as they curb the international division of labour and hurt productivity, which is the main long-term driver of economic growth. 

Stefan Hofrichter, chief economist at Allianz Global Investors, says inflation fanned by populism is the premium investors will pay to compensate for the eroding value of their capital. 

He expects to see “far greater dispersion” of economic growth rates, with countries like Germany, Canada and Japan “safer” bets as, so far, they are implementing fewer anti-globalisation policies.  

Few can question the view that Britain will be a risky investment destination over the next five years because of its departure from the EU in March 2019, particularly if there is no agreement beforehand on trade, finance and other key issues. 

Many economists believe that global markets will become more concerned about the impact of political and economic uncertainty surrounding populism.  

Emerging markets are most at risk because they benefitted the most from globalisation and must therefore shift their focus away from exports to the West towards consumption-driven growth and intra-regional trade, Hofrichter says. 

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 22 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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