14th February 2017

Reflecting on a tumultuous few months, it feels as though we are not just transitioning to a new president in the United States but perhaps to a new world order. Post Bretton Woods the liberal elite has held sway over global affairs with the US occupying a dominant position. This dominance has been felt not only in terms of global trade/geopolitics but also in respect of the substantial American influence over institutions like the World Bank, United Nations, IMF, WTO etc. What we are witnessing today is a challenge to this dominance, but one which surprisingly is being led from within and not from the growing economies of the emerging world.

The populist movement, something of an over-used term at this stage, has so far been clear about the need to tear down existing structures in terms of trade and immigration. Structures which have helped create unprecedented global prosperity over the last 50 years. As for coherent policies that can generate real growth we have not seen the same clarity. Blaming foreigners first has certainly struck a chord with much of the electorate. The steady decline in manufacturing jobs in the US for example (from 50% of total employment in 1950s to 8% today) may feel like justification to many for a rejection of globalisation. Such analysis, however, would also ignore the rise in employment elsewhere. One wonders too, what impact the establishment of barriers to foreign talent will have on growth over the medium term. Nevertheless, the reality is an ever-increasing part of the population has felt left behind by a system that was rigged in favour of the elite. A system facilitated by central banks, regulators and corporate lobbyists. Excessive debt creation has resulted in a sub optimal outcome for the many, to the benefit of the few.

And so to the change in policy. Like Abe in Japan before him, Trump came to power on the promise of radical economic change. Indeed a look back at history suggests that Japan represents an interesting test case for what is happening in the US today. In implementing massive tax cuts and infrastructure spending, government debt exploded from 69% of GDP in 1997 to 200% of GDP in 2016. Over that period, however, nominal GDP has remained broadly unchanged. Consider that, when Japan undertook these policies, the global economy was in a far healthier, far less leveraged state. In a similar vein, the tax cuts that took place during the Reagan and Bush era were effected at a time when government debt to GDP was 32% and 57% in 1981 and 2002 respectively. Today that number stands at 105.5%. With this in mind, a delicate approach is required to ensure total debt levels do not suffocate growth potential further down the line. Herein lies one of the main difficulties with attempting to create sustainable growth in today’s global economy. Each short-term growth spurt results in a simultaneous increase in interest rates that raises the cost of debt servicing in already heavily leveraged economies.

All is not lost however. Global growth can continue to sustain itself at 3% for the coming decades with technological innovation and advances in renewable energy gathering momentum. Will it be enough though, to overcome the demographic and political challenges that will inevitably emerge?

Steve O’Hanlon, February 2017



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