Each passing week brings new evidence to support the contention that the damage from the epochal shift towards protectionism and away from globalization and multilateralism is already done. It’s now just a question of whether it gets worse.
The IMF and the OECD have slashed their outlook for the global economy repeatedly, warning time and again that without an end to the trade conflicts, fiscal stimulus or, ideally, both, the situation will become increasingly dire.
“The global economy is facing serious headwinds and slow growth is becoming worryingly entrenched”, OECD Chief Economist Laurence Boone said last month. “The uncertainty provoked by the continuing trade tensions has been long-lasting, reducing activity worldwide and jeopardizing our economic future”.
In other words: This is not a drill. The ongoing backslide into protectionism and nationalism at the expense of globalized markets and inclusive politics has chipped away at the very foundation on which the modern system of trade and commerce is built. That foundation hasn’t crumbled yet, but it’s getting shakier by the month.
Underscoring all of this is BofA’s Athanasios Vamvakidis, who delivers a strikingly blunt assessment in a note dated October 21.
“Secular stagnation has now become our baseline”, Vamvakidis writes, adding that “growth is slowing in almost all major economies, in some cases from already low levels”. Here’s a bit more:
Trade deals are only likely to avoid further tariff increases, at least for now, while keeping the tariffs of the last two years in place. Political uncertainty in the US is likely to increase ahead of the elections next year. We see increasing evidence that monetary policy has become ineffective, accumulating negative side effects. Fiscal policy is not coming to the rescue, and in any case, very few major economies could afford it. Structural reforms remain a theoretical and unpopular concept for most governments. Having to fight increasing populism, mainstream governments have often become reluctant to push for much needed reforms. Tight labor markets, in any case, suggest capacity constraints. Increasing wages without inflation also point to risks for profits.
If you’re getting the impression that policymakers and centrist politicians are hemmed in on all sides by populism, you would be correct. Reforms aimed at restoring what, on textbook definitions, would count as “healthy” economic dynamics conducive to long-term stability and sustainable growth, simply aren’t palatable in the current economic environment.
Of course, populist politics raises the odds of fiscal stimulus being enacted, but as Vamvakidis notes, there isn’t much scope for that, unless you simply scrap the playbook in favor of unorthodox policies (e.g., variants of MMT).
Meanwhile, the break down of traditional models linking labor market slack to inflation combined with the threat of lackluster growth and input price pressures from tariffs, point to crimped corporate profits going forward.
And then there’s monetary policy operating at the limits, with central banks forced to question what’s possible in terms of negative rates and balance sheet expansion – and whether any benefits from plunging further down the rabbit hole will be more than offset by deleterious side effects, both known and unknown.
Hilariously – or not – BofA goes on to write that the above is actually the best case scenario. To wit:
And this is the good case scenario, as we are concerned that an unexpected shock could bring the global economy to its knees. Monetary policy has almost no room to respond in most cases. Government debt levels are much higher almost everywhere compared with before the last global crisis. International policy coordination is in the worst state in recent decades. Populism could get another boost, making the appropriate policy response even more difficult.