Political Risks Rising In The World Along With Economic Risks

by: John M. Mason

Summary

The International Monetary Fund has lowered estimates for world growth in 2016. This is the fourth time in a row it has lowered its forecast.

The IMF also makes it clear that the greater risk is for even lower economic growth than forecast because of growing political issues.

The IMF dropped its forecast for US growth in 2016 below 2.0 percent exacerbating the potential discontent against world trade in the current presidential election process.

The International Monetary Fund, for the fourth time in a row, lowered its estimates of world economic growth in 2016. It dropped its forecast 0.2 percent to 3.2 percent.

The view for next year is for world economic growth to rise to 3.5 percent, the IMF warned that the downside risks are greater going forward. The downside risks included "terrorist attacks, waves of refugees and rising nationalism, as well as the impact of economic inequality."

These last items lead into the threat of political changes that might thwart further globalization of trade.

The noise has picked up around the world that the stagnant economies and the slow growth in wages have severely hurt the "workers" in most countries while the top executives continue to pocket substantial rewards.

Maurice Obstfeld, the IMF's chief economist, warns that there could be a US backlash against globalization, which "threatens to halt or even reverse the postwar trend of evermore open trade."

Mr. Obstfeld adds that "Across Europe the political consensus that once propelled the European project is fraying " arguing that "the refugee crisis and recent terrorist attacks had combined with economic pressures, including stagnant wages to lead a 'rising tide of inward-looking nationalism.'"

There is also the danger that Brexit, the British exit from the European Union might bring. There is even concern that if the United Kingdom were to exit the EU that this could cause a breakup of the EU itself. And, some are even predicting that Scotland might vote again to leave the UK if Brexit took place.

As far as the United States, the IMF also reduced the rate it sees the US growing in 2016. It dropped the expected rate of growth in the US from 2.1 percent to 1.9 percent.

This places the IMF forecast below that of the Federal Reserve System whose forecast for 2016 is 2.2 percent. The most important thing in the IMF forecast is the tone of the presentation.

Economically, things are not too good and, oh, by the way, things could get worse politically. And, there seems to be very little that governments can do to correct the situation.

The European Central Bank has extended its quantitative easing and this seems to be having very little effect on the performance of the economies that make up the eurozone.

Officials in Japan have become very frustrated as its efforts to extend quantitative easing with negative interest rates have not helped the economy and the value of its foreign currency has strengthened, rather than weakened.

The IMF sees particular problems ahead for Russia, still under sanctions, and Brazil, which is now going through an impeachment process along with its other difficulties. And there are other countries, like Venezuela, that are on the brink of absolute collapse.

The major thing that seems lacking in the face of all this "not so good" news is any convincing idea of what is going on and how things might be improved. This is, obviously, not good news for either the world economy or for financial markets.

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