The rise of populism could lead to greater trade protectionism, rising inflation and falls in real economic growth, economists warn.

Standish chief economist Vincent Reinhart said output and economic growth, as measured by gross domestic product, has slowed to an average of less than 2 per cent in advanced economies such as Australia, the US, Britain and Canada since the global financial crisis, driven by ageing populations and lower labour force participation.

In contrast, emerging economies’ GDP growth forecasts were more dispersed but averaged a much higher rate and had taken up a larger global GDP footprint, he said.

This translated into household wealth doubling every 56 years in advanced economies, compared with 21 years previously, which is “a conversation we need to have with our grandchildren” on when lives would improve, Reinhart said.

“We have slower growth and that leads to the politics of the issue; there are losers who don’t see their lot improve and [that’s] why people in the UK voted to leave the European Union, and why others in the US rejected two traditional economic candidates in Jeb Bush and Hillary Clinton to vote for an unknown.”

Reinhart made his comments at the 2017 Investment Magazine Fixed Income, Cash and Currency Forum in Healesville, Victoria, in July, during a panel session titled: From Globalism to Populism, and Monetary Policy to Fiscal Policy.

More protectionism

Speaking in the same session, QIC economist Drew Klease predicted populism would cause increased trade protectionism, which would lead to lower potential GDP growth.

He said, however, that fears the world had reached peak globalisation had eased somewhat after US President Donald Trump backed away from election promises to exit NAFTA and charge tariffs on imports from China and Mexico, and populist leaders Marine Le Pen in France and Geert Wilders in the Netherlands were defeated at the polls.

Even so, threats of a “tariff tit-for-tat” between a protectionist US Government and its trading partners would put pressure on input prices for US manufacturers such as the auto industry, prompting further protectionism, Klease said.

“It’s easy to imagine how Trump’s protectionism could open a can of worms and potentially lead to a downward spiral,” he told the forum.

QIC modelled the impact of a scenario in which the US applied a 10 per cent import tariff across the board with its trading partners, which retaliated with their own tariffs. Klease indicated this scenario would “likely lead to much lower productivity growth across the global economy and wipe about 6 per cent from…US real GDP by the end of 2020”.

This would translate to US growth of on average 1 per cent to 2021, down from forecasts of 2.25 per cent. It would raise inflation and force the Federal Reserve to lift interest rates more quickly to keep inflation anchored – a “toxic mix” for fiscal sustainability, Klease said.

This scenario would prompt more fiscal austerity across other nations to manage debt levels, and lead to a fall in global trade.

Meanwhile, an Australian dollar sustained at US80 cents would hinder our economic growth and cause inflation to fall, Klease said. Housing market risks would prevent a rate cut by the Reserve Bank but it would be forced to jawbone the rate down.

Xi Jinping’s China

While it was a dismal outlook, Klease said 2017 has been a turning point for the global economy, with many severe risks from populism averted. However, analysts need to watch for under-the-radar protectionism from the US, see how unfolding Brexit negotiations fare, and monitor next year’s Italian election for further risks.

Looking to the world’s largest emerging market, Goldman Sachs Asia-Pacific fixed income head Philip Moffitt said fiscal policy has lifted debt loads to unsustainable levels in China, but the result of President Xi Jinping’s strengthened political power would be “the fiscal topic [being] tackled” and monetary policy being used to drive peripheral credit out of the market.

The Asian giant would work in contrast to advanced economies to keep its debt and deficit in check, he said.

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