Gov­ern­ments be­hav­ing badly — po­lit­i­cal risks to growth in 2019

Gulf Times Business - - BUSINESS -

Gov­ern­ments be­hav­ing badly — with pop­ulists and au­thor­i­tar­i­ans flout­ing the rules and in­ter­na­tional re­la­tions fray­ing — pose some of the big­gest risks to the world econ­omy in 2019. Bloomberg Eco­nom­ics say the year ahead prob­a­bly won’t bring the end of the cy­cle, “but risks are grow­ing and new sources of fuel are needed.”

Here’s a look at some of the po­lit­i­cal flash points that could de­rail growth next year.

Trade Wars

If there’s one thing Democrats and Re­pub­li­cans agree on, it’s that China’s rise is a chal­lenge for the US. The risks from China in­clude threats to the tech­nol­ogy sup­ply chain, Bei­jing’s mil­i­tary ex­pan­sion, and the coun­try’s ef­forts to un­der­mine sanc­tions on North Ko­rea, ac­cord­ing to the US-China Eco­nomic and Se­cu­rity Re­view Com­mis­sion, an an­nual re­port by a bi­par­ti­san con­gres­sional panel. On the other side of the Pa­cific, Xi has staked his rep­u­ta­tion on man­ag­ing China’s rise as a global power. With the two coun­tries ap­par­ently locked on a col­li­sion course, the big­gest risk to the world econ­omy re­mains the US-China trade war. Even if the G-20 truce holds, the dis­pute could rep­re­sent the early stages of a pro­longed eco­nomic cold war. If Pres­i­dent Don­ald Trump fol­lows through on threats to slap du­ties on all im­ports from China, Bloomberg Eco­nom­ics es­ti­mates a hit of 1.5 per­cent­age points to China’s 2019 gross do­mes­tic prod­uct growth.

That would take growth down to­ward 5%, though a ma­jor pol­icy re­sponse by China would soften that blow.


Italy’s pop­ulist gov­ern­ment is locked in a tus­sle with Brus­sels over a planned spend­ing spree, un­nerv­ing in­vestors and Eu­ro­pean Union au­thor­i­ties. Next year could be make or break, not just for the pop­ulist ad­min­is­tra­tion, but also the EU’s abil­ity to im­pose bud­get dis­ci­pline on mem­ber states. The Eu­ro­pean Com­mis­sion said in its an­nual re­view of euro area na­tions’ spend­ing plans that Italy’s bud­get is in “par­tic­u­larly se­ri­ous non­com­pli­ance” of EU lim­its. Ten­sions be­tween the rul­ing coali­tion part­ners — the anti-es­tab­lish­ment Five Star Move­ment and the anti-mi­gra­tion League — could see the al­liance col­lapse be­fore or af­ter next May’s Eu­ro­pean Par­lia­ment elec­tions, plung­ing Italy into an­other bout of po­lit­i­cal chaos. Even if the gov­ern­ment en­dures, Italy could come un­der pres­sure in fi­nan­cial mar­kets. The 10-year yield is al­ready at the high­est in more than four years.


Bri­tain’s rup­tured po­lit­i­cal land­scape has ob­scured the na­tion’s exit path from the EU, with lit­tle con­sen­sus on how that will be even­tu­ally achieved. Amid a fluid sit­u­a­tion, the risk of a change in Prime Min­is­ter, or gov­ern­ment, re­mains high. A no-deal Brexit could mean Bri­tish GDP is about 7% lower by 2030 com­pared to re­main­ing in the EU, ac­cord­ing to Bloomberg Eco­nom­ics. A Brexit that in­volves the UK stay­ing part of a cus­toms union with the EU would still in­volve a hit to the econ­omy. Out­put would likely be 3% lower by 2030 in that sce­nario.

Demo­crat-con­trolled house

In the US, the Demo­crat takeover of the House of Rep­re­sen­ta­tives could crip­ple Pres­i­dent Trump’s agenda, open­ing the way for un­fet­tered in­ves­ti­ga­tions into his ad­min­is­tra­tion, his pres­i­den­tial cam­paign and his fam­ily’s busi­ness em­pire. That would mean two years of pol­icy grid­lock, so for­get about ad­di­tional tax cuts and in­creased in­fra­struc­ture spend­ing and brace for pe­ri­odic bouts of drama and threat­ened gov­ern­ment shut­downs. A Demo­crat-con­trolled House could even launch an ef­fort to im­peach Trump — though if it went that far, the pres­i­dent’s ul­ti­mate fate would rest with the Re­pub­li­can-dom­i­nated Se­nate.


Next year will see elec­tions in sev­eral ma­jor emerg­ing economies, with far­reach­ing im­pli­ca­tions for their pol­icy stance and mar­ket sta­bil­ity. Ar­gentina, In­dia, In­done­sia, South Africa and Nige­ria are among those headed to the polls. As Brazil’s re­cent elec­tion showed, strong­men with un­con­ven­tional plat­forms con­tinue to ap­peal. Vot­ers are more keen on send­ing a mes­sage to the es­tab­lish­ment than on sign­ing off on more of the same. Of the ma­jor de­vel­oped economies, Canada and Aus­tralia face elec­tions, though rad­i­cal pol­icy shifts are less likely in ei­ther coun­try.


Oil’s los­ing streak has pushed Mid­dle East pol­i­tics back into the spot­light. US and Iran re­la­tions will be key, as will the di­rec­tion of Opec and its al­lies on any cuts to out­put. US re­la­tions with Saudi Ara­bia are also un­der scru­tiny. Trump has said he won’t let the mur­der of US-based colum­nist Ja­mal Khashoggi jeop­ar­dise re­la­tions be­tween both coun­tries and has warned re­porters that if the US broke with Saudi Ara­bia, oil prices would “go through the roof.”

Asia’s wa­ter­ways

With North Ko­rea halt­ing provo­ca­tions and pur­su­ing diplo­macy, East Asia’s wa­ter­ways could be the big­gest flash point in the re­gion. The US has boosted sup­port for Tai­wan and plans to step up free­do­mof nav­i­ga­tion ex­er­cises in the South China Sea, in­creas­ing the risk of mis­cal­cu­la­tion that could spark an in­ci­dent with China. The East China Sea is also a peren­nial worry.

Black Swan

“My big­gest risk is less to do with a par­tic­u­lar coun­try, it’s a wild ter­ror­ist at­tack,” Robin Ni­blett, the di­rec­tor of Chatham House, said in an in­ter­view. An at­tack could take any form, in­clud­ing cy­ber, with knock on con­se­quences for the world econ­omy as a ma­jor in­ci­dent could pro­voke a back­lash from gov­ern­ments, Ni­blett said. While there were 10,900 ter­ror­ist at­tacks in 2017 — killing more than 26,400 peo­ple, the num­ber of at­tacks de­clined for the third con­sec­u­tive year, ac­cord­ing to the Univer­sity of Mary­land’s Na­tional Con­sor­tium for the Study of Ter­ror­ism and Re­sponses to Ter­ror­ism.

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