What You Believe Is the Biggest Obstacle to Global Economic Growth
Global economic growth is lagging. In much of the developed world, anemic growth is accepted as a given, while the torrid, double-digit expansion rates seen in China and India over the last decade have fallen off.
The question is why.
For insight into this, we asked readers of CFA Institute NewsBrief what they believe is the single biggest obstacle to global economic growth. Presumably asset prices respond to the gyrations of both the amount and quality of economic growth — the size of profit margins, for example.
I believe the biggest obstacle to global economic growth is . . .
* Results do not add up to 100% due to rounding.
The Rise of Populism
The recent performance of equities markets suggests that United States economic growth is set to soar. Yet globally, there are multiple and mounting impediments. Perhaps these obstacles all share a common cause: political regime change.
The minimal volatility political system that developed following the collapse of the Soviet Union in the early 1990s is gone. In its stead is a populism most visibly reflected in the UK vote for Brexit and the election of President Donald Trump in the US. There are also surging populist candidates in critical upcoming elections in France, the Netherlands, Italy, and even Germany.
Poll results reflect these trends: 35% of the 820 respondents identified the rise of populism as the principal constraint on growth. Nobody knows where global populism will lead and, thus, this category could also be called uncertainty.
Geopolitical Tensions
Populists take a very different approach to foreign policy. They tend to favor stronger defense, more aggressive diplomacy, and an “us-versus-them” mentality.
In the United Kingdom, there is discussion of crafting a new foreign policy separate from that of the European Union (EU). In the US, President Trump has pledged to build a border wall to separate from Mexico, a neighbor and ally. Trump also breached the country’s long-standing “One China” policy by communicating with political leadership in Taiwan, fueling tensions with China, before recently recommitting to the policy.
Elsewhere, even nations that have thus far avoided the populist tide are embracing a more assertive approach to foreign policy. China, Japan, Israel, Iran, Russia, and North Korea all have taken more hawkish stances than in years past.
The geopolitical reality of the post-11 September 2001 era looks to be giving way to a new period. About a quarter (26%) of respondents believe geopolitical tensions now constitute the primary restraint on economic growth.
Possible Trade Wars
Populists are also leading a reassessment of global trade policy. Specifically, they are calling for an end to an extended period during which globalization was the economic policy du jour.
Voters throughout the world are casting their ballots for candidates who support nationalistic economic policies. These include large domestic spending programs, the exit from or avoidance of international trade agreements, and the embrace of tariffs.
When goods and services are priced and sourced domestically, they are rarely produced at the lowest cost. If the economic goods are the same, then capital may be misallocated and could lead to lower economic growth.
In fact, 20% of poll respondents believe the potential drawbacks of trade wars and new tariff walls are the main check on growth.
Lack of Global Economic Coordination
One of the dividends of a stable international system of both politics and trade is global economic coordination.
In the heart of the Great Recession, central banks and regulators coordinated their responses to the economic meltdown. Yet amid this coordination, there was a lack of national and international legislative consensus on just what the correct economic policies were.
Were governments supposed to raise or cut taxes? Increase or decrease spending? Enter into or exit trade agreements? There was no fiscal policy agreement.
Now central banks are diverging in their policy responses as they turn their eyes to the domestic theater and away from the international stage. Now the EU appears fragile. Now trade agreements look wobbly. And so on.
What is missing is a global perspective on the part of the international system. Of respondents, 16% believe this is the largest obstacle to economic growth.
Rising Interest Rates
The post-Great Recession era is the lowest interest rate environment in recorded human history. In fact, money has never been cheaper. Put another way, central banks globally underwrote the global economic expansion since 2009. Yet inflation is beginning to rise in some of the large economies, including the US and the EU.
In response, central banks — the US Federal Reserve, among them — are considering normalizing interest rates by raising them.
Will this hinder economic growth? Nobody knows — which may explain why just 4% of poll respondents focused on interest rates.
So what’s the lesson in all of this?
Whatever their cause, impediments to global economic growth are on the rise.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
I can’t help but think the respondents have the causality backward. The rise in populism is a symptom of slower economic growth and not the cause.
Hello,
Thank you for your comment. In my opinion, you raise a great point. Thank you for ensuring it is a part of the possible interpretation of this data.
Yours, in service,
Jason
Like many online surveys, this one raises more questions than it answers. Who and how many are the readers of “CFA Institute NewsBrief”? Are they CFA charterholders? Although clearly not a random sample, is 820 a statistically significant number of responses? How were the 5 possible responses selected? Why was an “other” response not provided? A reader of CBOK may have included “Productivity Trends”, “Technology Trends” or “Public and Private Debt Levels”. Each response is open to a wide degree of interpretation, so it is not clear what specific factors respondents are referring to. My observation is that the phrasing of the response with the highest degree of emotive content received the highest percentage response. Is this the intervening variable?
Hi Tim,
You ask some excellent and natural questions. Your questions highlight what is an (unintentionally) opaque process. Let me try to shed some light on the subject. In answer to your questions…
1. If memory serves we have over 40,000 subscribers to the CFA Institute NewsBrief.
2. When we did a subscriber audit we found that the overwhelming majority of subscribers were either CFA charterholders, or candidates for the charter.
*. You are correct that it is not a random sample. For example, you can vote more than once. This is why we do not present the results using standard statistics reporting. We do not represent the data as statistically significant. This is not a function of our desires, but is a function of our third party provider’s limitation on their survey function. Though less than ideal, as an organization we like the ability to take quick straw polls, if you will, about what a number of people in the investment space believe at any given moment.
3. See asterisked response above. No, not statistically significant because the sample is not random.
4. The question and possible responses are created each Monday morning by a team at CFA Institute that is around 15 folks. This team is composed of a number of former research analysts, fund managers, market structure experts, and content experts. You can get a sense of who composes the team by the names of those of us that write the poll analysis. Questions are proposed along with responses by a lead author – this week it was me – and then the rest of the team critiques the question and the responses.
5. In this poll I did not propose an ‘other’ category, and the subsequent critique rounds did not ask for an ‘other’ category. We do sometimes feature an ‘other’ category. Usually we add that when we believe that there is not a plurality of responses represented by the answer set proposed, or when we think a question is likely to have an uncertain audience. This is a judgment call based on the group’s thinking.
6. Regarding your final question. We are sensitive to question phrasing as well as the possible answers provided. For almost all questions the very consideration you raise is a part of the discussion. Namely, how to make the question and answers as emotion-free as we can. One frequent consideration is that if a question asks for clarification about a piece of ‘conventional wisdom’ we typically list the ‘contrarian’ options first to ensure that respondents favoring the ‘conventional wisdom’ must read through each of the possible responses before responding.
I hope this brings more clarity to the process of our poll authoring, and subsequent analysis.
Yours, in service,
Jason
I’ve spent quite a bit of time interviewing the 99 percenter in the United States and I can tell you they’re VERY angry about the effects of globalism and are now leaning very hard on their senators and congressmen to change America’s policy toward it.
Will it come to anything? Since at least the Bill Clinton administration politicians have been protected from the will of the people by copious infusions of corporate cash, I’m not certain that wall will hold up much longer. Whether we like it or not, sometimes pressure from everyday citizens translates into legislative action.
I think the question should be changed to “I believe the biggest obstacle to global economic growth OVER THE SHORT RUN is . . . ”
Populism, geopolitics, trade wars, rising interest rates, etc. are all recent factors to the slowing economies.
I believe the most fundamental reason of slowdown in economic growth OVER THE LONG RUN is due to low birth rate and aging population. Japan has already shown the world. In the not-so-far future the world will be like Japan, we will have a very slow growing world economy on an absolute basis (though GDP per capita, i.e. the living quality and productivity of each person, will continue to improve).
Jason,
Thank you for the thought provoking article. I wonder: what would a trade war with another country could actually LOOK LIKE in terms of dollars and cents, real impact on movement of labor? In our country, and per the situation in Japan described above, if the growth of labor is suppressed via political power, it then places a burden on general productivity growth to accelerate, i.e., some form of investment in productivity (people) within the nation. Wonder what effects a continued populist movement would have on capital flows in general? How does that affect treasuries?! Curious what thoughts are already out there.
Hi Jeff,
Thank you for your feedback and commentary. My colleague, Ron Rimkus, writes about trade wars every once in awhile, so you might want to check his work out here on Enterprising Investor. Also, much of CFA Institute’s content library is free to the public, you can find our vast archive at http://www.cfapubs.org. My own opinion is that populism is always a short-term phenomenon. The reason is that it is an indication that democratic processes are still trusted enough to log a very disgruntled vote. When people vote, rather than shoot their way to power it means that democracy is still working. However, more entrenched power interests covet votes so they tend to shift their rhetoric and their policy prescriptions to be more in align with the populists. You saw this in the Clinton campaign, where by the end her platform, when she talked about it, was more like that of Bernie Sanders. All of that said, if there is a permanent shift toward more populist concerns, most of the commentary I have seen says that it will hurt economic growth slightly. If memory serves the World Economic Forum and the IMF have discussed their forecasts in a populist world.
Yours, in service,
Jason