The global economy has been buffeted recently by trade tensions between the United States and China and slowing growth. But a greater risk looms around the world in the form of rising populism that threatens to unravel the postwar economic order, said Joseph Brusuelas, chief economist at RSM at a recent conference held by the Ontario Securities Commission in Toronto.
The risk is everywhere: in Canada and the United States, in Europe, Asia and Latin and South America, Brusuelas said. It’s being driven by rising economic inequality that has put a wedge between those who have benefited from the emerging global economic order and those left behind.
In the end, it makes for a world of increased risk for investors and only adds to the strains on the global economy.
“We know how this ends,” Brusuelas said, citing the experience of South American countries that have had populist upheavals in the recent past.
Brusuelas pointed to a divide in the American economy in the all-important consumer sector, where 40% of the upper-income households are responsible for 60% of spending.
“If you ever want an illustration of economic inequality in advanced economies, that’s it,” he said.
At the same time, as populism takes hold, there is a push toward deglobalization, or an unraveling of the economic framework that created basic rules governing global trade and finance after World War II.
“Deglobalization is the single biggest policy mistake outside security arena in past 20 years,” he said. As it continues, it will only dampen overall economic activity, he added.
This trend has also contributed more recently to the growth of negative interest rates in government securities, particularly in Europe, as countries try to spur their economies. The total value of government securities carrying negative interest rates now stands at $12.7 trillion, according to Bloomberg.
It’s one reason that Brusuelas sees concern over inflation in the United States as overblown.
“We live in a time where we’re integrating very advanced technology in production of goods and provisions of services, which is inherently deflationary,” he said.
But some policymakers, he said, have been doing the monetary equivalent of fighting the last war. “The idea that inflation is always everywhere in monetary phenomenon is true in some conditions but clearly not in the current climate,” he said.
Finally, Brusuelas said he did not see a risk of recession in the short term. If anything, recession models have improved in recent months primarily because of improvement in financial conditions, he said.
That could change, he cautioned, if the trade tensions escalate or if there is a big outside shock to the economy over energy, for example.
“An economic downturn is inevitable,” he said. “The questions are really about when it will happen and how deep it will be.”
