Global economic growth is lagging. In much of the developed world, anemic growth is accepted as a given, while the torrid, double-digit expansion rates seen in China and India over the last decade have fallen off.
The question is why.
For insight into this, we asked readers of CFA Institute NewsBrief what they believe is the single biggest obstacle to global economic growth. Presumably asset prices respond to the gyrations of both the amount and quality of economic growth — the size of profit margins, for example.
I believe the biggest obstacle to global economic growth is . . .
* Results do not add up to 100% due to rounding.
The Rise of Populism
The recent performance of equities markets suggests that United States economic growth is set to soar. Yet globally, there are multiple and mounting impediments. Perhaps these obstacles all share a common cause: political regime change.
The minimal volatility political system that developed following the collapse of the Soviet Union in the early 1990s is gone. In its stead is a populism most visibly reflected in the UK vote for Brexit and the election of President Donald Trump in the US. There are also surging populist candidates in critical upcoming elections in France, the Netherlands, Italy, and even Germany.
Poll results reflect these trends: 35% of the 820 respondents identified the rise of populism as the principal constraint on growth. Nobody knows where global populism will lead and, thus, this category could also be called uncertainty.
Geopolitical Tensions
Populists take a very different approach to foreign policy. They tend to favor stronger defense, more aggressive diplomacy, and an “us-versus-them” mentality.
In the United Kingdom, there is discussion of crafting a new foreign policy separate from that of the European Union (EU). In the US, President Trump has pledged to build a border wall to separate from Mexico, a neighbor and ally. Trump also breached the country's long-standing "One China" policy by communicating with political leadership in Taiwan, fueling tensions with China, before recently recommitting to the policy.
Elsewhere, even nations that have thus far avoided the populist tide are embracing a more assertive approach to foreign policy. China, Japan, Israel, Iran, Russia, and North Korea all have taken more hawkish stances than in years past.
The geopolitical reality of the post-11 September 2001 era looks to be giving way to a new period. About a quarter (26%) of respondents believe geopolitical tensions now constitute the primary restraint on economic growth.
Possible Trade Wars
Populists are also leading a reassessment of global trade policy. Specifically, they are calling for an end to an extended period during which globalization was the economic policy du jour.
Voters throughout the world are casting their ballots for candidates who support nationalistic economic policies. These include large domestic spending programs, the exit from or avoidance of international trade agreements, and the embrace of tariffs.
When goods and services are priced and sourced domestically, they are rarely produced at the lowest cost. If the economic goods are the same, then capital may be misallocated and could lead to lower economic growth.
In fact, 20% of poll respondents believe the potential drawbacks of trade wars and new tariff walls are the main check on growth.
Lack of Global Economic Coordination
One of the dividends of a stable international system of both politics and trade is global economic coordination.
In the heart of the Great Recession, central banks and regulators coordinated their responses to the economic meltdown. Yet amid this coordination, there was a lack of national and international legislative consensus on just what the correct economic policies were.
Were governments supposed to raise or cut taxes? Increase or decrease spending? Enter into or exit trade agreements? There was no fiscal policy agreement.
Now central banks are diverging in their policy responses as they turn their eyes to the domestic theater and away from the international stage. Now the EU appears fragile. Now trade agreements look wobbly. And so on.
What is missing is a global perspective on the part of the international system. Of respondents, 16% believe this is the largest obstacle to economic growth.
Rising Interest Rates
The post-Great Recession era is the lowest interest rate environment in recorded human history. In fact, money has never been cheaper. Put another way, central banks globally underwrote the global economic expansion since 2009. Yet inflation is beginning to rise in some of the large economies, including the US and the EU.
In response, central banks — the US Federal Reserve, among them — are considering normalizing interest rates by raising them.
Will this hinder economic growth? Nobody knows — which may explain why just 4% of poll respondents focused on interest rates.
So what's the lesson in all of this?
Whatever their cause, impediments to global economic growth are on the rise.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.