Shifting Political Risk & Prospects for Global Soft Landing

  • The four global recessions since 1961 have been triggered either by adverse supply shocks (both triggered by geopolitical upheaval prompting an oil price spike), or by financial implosions.
  • Although there are risks of a significant oil price hike, or a sustained and/or intensified trade war that would lead to global financial implosion, we do not regard either of these risks as either imminent or systemic, and indeed none are part of our central economic scenario over the next four years.
  • Political risk is not dead, but it has evolved considerably. Geopolitical risks appear less likely to become systemic — thanks to changing commodity supply dynamics — in contrast to previous decades. Political and policy uncertainty affecting trade, sanctions, regulation, diplomatic norms, and the strength and independence of institutions is generating increased political turbulence, with modest and episodic effects on financial markets and the business environment, but limited impact on the global economy.
  • Should any kind of global slowdown materialize, the lack of conventional monetary policy space in most advanced economies will be a material obstacle to the implementation of appropriate countercyclical policy.
  • Countercyclical fiscal policy space is widely available, especially if the additional debt issuance can be monetized.
  • The obstacles to appropriate countercyclical policy when the next global recession threatens are likely to stem from weak political capacity and will, owing to political fragmentation, rather than from a lack of combined monetary and fiscal countercyclical policy space. The impact of political risks is more likely to manifest itself in a slower, weaker government reaction function, rather than as a catalyst of a downturn or major financial market event.