Can politics shake the economy out of its torpor?

The effects of low economic growth, low inflation and low interest rates were reflected in 2016.

The effects of low economic growth, low inflation and low interest rates were reflected in political developments during 2016. Populist sentiment was on the rise throughout the developed world, as made evident by the US election result and the Brexit vote in the UK.

In 2017, federal elections in Germany, the French presidential election and a general election in Holland could all demonstrate popular discontent playing a prominent role in voting patterns.

Elsewhere, if economic decision making is influenced by populism then the current seven‑year period of growth, however weak, could be halted.

For now, one of the most striking features of the global economy remains modest economic growth. The UK economy, measured by the value of all goods and services (known as gross domestic product or GDP), grew by around 2.1% last year. This is an improvement on recent years, but has only been achievable thanks to an environment of historically low interest rates and unprecedented economic stimulus, such as quantitative easing, i.e. electronically printing money.

Despite growth, the benefits have not spread throughout the economy.

Wage growth, for example, has been sluggish over the past few years and there are still challenges remaining from the financial crisis. Also, lower business confidence has led to both a reduction in spending and an underinvestment in capital stock (capital used in the production of goods and services, such as machinery), which can have the consequence of reducing potential economic growth.

If 2017 begets further electoral success for the populist vote, it could lead to increased protectionism, such as a reduction in free trade between countries, and limits on migration. These developments could adversely affect the global economy by reducing trade.

Nonetheless, a new wave of politicians who some might consider radical, could cause improvements in the global economy or provoke incumbent politicians and central banks to find more effective solutions to deal with the challenges facing the economy.

Several policy changes put forward by politicians that can be regarded as populist could feasibly support economic growth. A greater emphasis on expansionary fiscal policies such as lower taxation and higher government spending could provide remedies for low economic growth.

Additionally, reforming corporate governance may encourage firms to spend and invest cash holdings which could generate further economic growth. However, such benefits may not be long-term.

One thing is clear: another year of low growth and poor economic decisions will not satisfy the widespread thirst for change.

Until now, investor sentiment has been relatively resilient to the upheaval, but it is uncertain how long this pattern can continue. While it seems that political change is becoming a constant, no one can guarantee that every incident will receive a positive reception. Such an unpredictable financial climate only serves to highlight the need to be highly selective when constructing investment portfolios.

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