Political Uncertainty and its Effect on World Economic Growth

Global economic growth has been held back in recent times and many factors play into this; however, political uncertainty has been at the forefront. Unpredictable political outcomes, such as the general election season in the world, instability in the Middle East, the Brexit, and China’s leadership reshuffle, have created considerable doubt and uncertainty in global markets.

Some of the largest economies in the world are going through a phase of political change. China’s plans to restructure its economy and liberalize it are moving very slowly due to the leadership reshuffle that is coming up next year. The Brexit's economic aftershocks have been proven to be unpredictable, but are expected to be unpleasant. The elections in France and Germany are raising concerns over the future of economic policies. Italy will be facing a constitutional referendum that will be critical to its economic reform.The US presidential election coming up next month will have very different outcomes regarding policies and trade deals. Any political outcome in these large countries could shift global economic growth significantly.

Additionally, some of the smaller economies are also going through major economic changes that are driven by internal or external political forces. The Mexican peso has depreciated against the dollar because of its inverse relationship to US Republican nominee Donald Trump, with about 80% of Mexico’s exports to the U.S. contributing to one-third of Mexico’s output. Colombians voted this month against a peace deal with the rebels which will hurt its economic health. Several countries in the Middle East and Africa are all trying to recover from the loss in oil revenue after Iran’s return and reduce their reliance on oil, while also trying to eliminate illegal oil exporters.

Nowadays politicians are pushing for trade barriers in an attempt to boost national growth. However, top policy makers argue that a weak global economy combined with the idea of protectionism will not benefit any side in the long run and will create an unfavorable cycle that will continue to depress trade and output. “The medicine that is being often prescribed is protectionism, and that is exactly the kind of medicine that is going to hurt the patient, not help him” said Roberto Azevedo, the director general of the World Trade Organization. The World Trade Organization states that growth in international trade this year will be at its lowest since 2007. The International Monetary Fund estimated that a rise in trade barriers, such as tariffs, could raise import prices by 10%, which would cause a 15% drop in exports in just 5 years. Consumption and global economic growth would both drop by about 2%.

Economic and financial officials are worried about the political uncertainty as market volatility is mimicking its rise just as it did in the global financial crisis in 2008-09 and the European crisis in 2011-12.