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A current trend is defining the global political scene, and that trend is uncertainty. Nowhere is this era of confusion better exemplified than in the United Kingdom, where the constant game-playing over Brexit continues unabated. It’s hardly better in the United States where the Trump presidency continues to draw a line that divides the country.
According to history, political uncertainty provides a direct correlation to a struggling economy. Does this hold true, is political strife a guarantee of bad news for the global economic mechanisms? In the casino-like world of economics, where taking major risks can lead to reward or disaster, there does seem to be some truth in the adage that political uncertainly means cooling of economic growth.
Trade policy plays a particularly large role in uncertain economic times. With a current trade war bubbling between the United States and China alongside a potential trade split between the EU and Britain, markets are becoming more fractured. So, predictions of a hard economy during the current political strife are well-founded, but what causes the confusion?
Unpredictable political climates generate recessions, and fear of the unknown is a major driver of economic struggles. Indeed, the unknown can rock the very foundations of the system of finance. For many investors and business owners, the unknown is a risk not worth taking. Think of it like this, if the current climate provides a high risk of failure because of political uncertainty, why would you take the risk?
Investors are willing to wait until political unrest corrects itself and a more stable situation arrives. It’s no good betting on tomorrow if it is uncertain what tomorrow will bring. Companies are increasingly valuing flexibility and are unwilling to make major market investments until the economy becomes more stable.
Arguably the biggest factor in the economic downturn has been the ongoing trade war between the United States and China. However, it is worth noting that the current slowdown started in 2017 and has been in steady decline since. So, yes, the trade war has accelerated global economic growth, but it is not the cause of it.
As the US and China continue to wrangle, the major impact of the trade war has been redefining of supply chains. Perhaps the economy will see growth when these channels have been reset, allowing some recovery despite the ongoing trade war. Still, we shouldn’t expect a major global uptick in economic performance while political discord remains widespread.
To reflect this outlook, the IMF has recently downgraded its global growth forecast for 2020. The international body specifically pointed to geopolitical issues and trade restrictions as factors behind the downgrade.
