by Mitch Kokai
Senior Political Analyst, John Locke Foundation
All of this bullishness will continue to stand in stark contrast to warnings by many world leaders. In just the past few weeks, German Chancellor Angela Merkel cautioned that the current international order is under threat. French President Emmanuel Macron noted that globalization is in the midst of a major crisis, and Canadian Prime Minister Justin Trudeau has stated that the unrest we see around the world is palpable and “isn’t going away.”
Whether or not the current correction reflects their fears, the politicians ultimately could be proved right. For one thing, geopolitical risk remains considerable. In 2017, Bridgewater Associates’ Developed World Populism index surged to its highest point since the 1930s, factoring in populist movements in the U.S., the United Kingdom, Spain, France, and Italy. So long as populism lingers as a political threat, the risk of reactionary protectionist trade policies and higher capital controls will remain heightened, and this could derail economic growth.
MEANWHILE, THE MARKET is mispricing structural challenges, in particular mounting and unsustainable global debt and a dim fiscal outlook, especially in the U.S., where the price of this recovery is a growing deficit. In other words, short-term economic gains are being supported by policies that threaten to sink the economy in the longer term.
The Congressional Budget Office, for example, has forecast that the U.S. budget deficit is on course to triple over the next 30 years, from 2.9% of GDP in 2017 to 9.8% in 2047. “The prospect of such large and growing debt poses substantial risks for the nation and presents policy makers with significant challenges,” the CBO cautioned. …
… As 2018 progresses, business leaders and market participants should—and undoubtedly will—bear in mind that we are moving ever closer to the date when payment for today’s recovery will fall due.