Economics and politics both work in cycles, and most of the time those cycles do not line up. Just take German Chancellor Gerhard Schröder, he was booted out by voters in 2005 after imposing painful economic reforms on the country. Angela Merkel has then reaped the rewards of those reforms, reforms which have made Germany such a strong economic player. She’ll take the credit of course but it was the luck of the economic cycle and the work of her predecessor, little more.
Today, almost ten years after the most severe financial crisis since the Great Depression we are finally seeing an economic upswing beginning. Across the world, from America to Asia, the entire global economy seems to be firing on all cylinders for the first time in a decade.
Yet while the economic cycle is back on an uptick the political mood is souring across the globe. There’s a populist rebellion spreading thanks to a decade of economic hardship, and the very idea of globalisation causes angry mutterings to abound.
This disassociation between the economy’s performance and political feeling is ultimately dangerous. We run the risk now of populist politicians getting credit for a more buoyant economy, their policies will gain traction and that could quite possibly lead to disastrous results.
Of course this is not the first uptick we’ve had in the economy in the past decade. Most years begin with economic optimism but it always finds itself beset by another problem, be it the euro crisis, the collapse of the price of oil, or the slowing growth in China. And while America’s economy has kept growing the frailty of the global economy kept its interest rates low.
Now though things seem to be different. For one thing the Federal Reserve has raised its interest rates for the second time in just three months, thanks mostly to impressive growth around the world. Fears of a Chinese implosion and of a yuan devaluation proved unfounded too. Not only that but Japanese capital expenditure has grown at its fastest rate for three years and the euro zone has been gathering momentum since 2015, not to mention the fact that euro zone unemployment is at its lowest level since the economic collapse.
Global activity is looking very positive indeed. In February South Korea broke the 20% mark for export growth, an impressive achievement. Taiwan meanwhile posted its 12th month of consecutive growth. Even countries worst effected by the recession are starting to see positive improvements. Brazil has seen either quarters of shrinking growth but now that inflation expectations have been curbed interests rates are beginning to fall, which means that Brazil is likely to add GDP this year rather than lose it.
Indeed the Institute of International Finance believes that in January the developing world hit its fastest monthly rate of growth since 2011.
Of course I’m not saying we should break open the champagne and declare the economy back to normal, far from it in fact. Oil prices fell by another 10% in the week leading up to March 15th after fresh fears about oversupply in the market. If that fall were to continued we’d be looking at huge damage to producers.
China’s continued build up of debt is also incredibly worrying, as is the slow growth in the the richer countries of the world. Outside of America wage growth is incredibly slow, and surging business confidence has not trickled down to the populace.
If we are to keep this recovering going we need to act quickly and decisively. Central banks are going to have to create a delicate balance between the pressure of tightening policy and the downside this will have on bond markets and borrowers, particularly if they act too quickly. Europe especially is vulnerable of this since the European Central Bank is close to reaching the legal limits of its bond-buying programme which it has used extensively to keep money cheap in its weak economies.
But its back to the political cycle where the biggest risk to the economy lies. After good employment figures Donald Trump was quick to sing his own praises, ever the modest. It is true that business confidence has increased since Trump’s promises of deregulation and a fiscal boost so he can toot his own horn in that regard, yet his claims to have magically jump-started a job boom are sheer lunacy, after all America’s economy has been creating jobs for 77 consecutive months.
It’s also wrong when Mr Trump claims this upswing is thanks to his “America First” brand of economic nationalism. There is no quick magical fix to such recessions, extensive research was conducted Harvard University into 100 banking crisis and their findings suggest that incomes only get back to pre-crisis levels after eight tough years.
Most economists preach that the best way to recover from a debt crisis is to quickly clean up your balance sheets, keep your monetary policy loose, and apply fiscal stimulus prudently. They don’t believe that threatening businesses and other countries with higher import taxes is the way to go.
Today’s impressive recovery finally gives credence to the economist belief. The Federal Reserve kept interest rates as low as they could until full employment was close to realisation. The European Central Banks bond buying programme has kept the cost of borrowing tolerable in countries like Greece and Spain. In Japan previous recoveries have been hampered by VAT increases, this time though they listened to sense and have deferred an increase until 2019 at the earliest.
This continued debate about who created this recovery is more than simple bragging rights though. If populist politicians are able to claim this victory it will give a great boost to insurgent parties in countries like France, where the far-right Marine Le Pen is running for president. It would also give support to the wrong policies. President Trump’s desire to make tax cuts for instance would complicate the delicate balance found by the Fed. His administration may also look to encourage him to bypass the infrastructure of globalisation (such as the World Trade Organisation) which has the potential of setting of a new trade war.
Populists can take no credit for this recovery, but they will try, and if they succeed we could find ourselves in a recession worse than that of 2008.