The global economy is in a dormant but dangerous state. Not much is happening. The Eurozone continues to be stagnant despite aggressive money creation by the ECB. The US economy is poised while the Fed considers whether it is going to tighten in terms of wages and employment before it can raise rates. Oil has fallen back to its earlier levels of around $40 since the Opec and friends foundered at the meeting to restrict output. The politics of the sectarian rivalry between Iran and Saudi Arabia scuppered the prospect of output restriction which could have taken the price up to $50.
The IMF has yet again downgraded its growth forecasts. This is standard behaviour during the downward phase of a Kondratieff cycle. But since analysts at IMF and elsewhere do not understand long cycles, they continue to forecast annually and then have to revise. If you consider that the upward phase of the Kondratieff began in late-1980s or early-1999s and the cycle peaked in 2008, you would expect a downturn to last at least until 2020, if not beyond.
The Great Recession has lasted eight years. Output levels are back at the pre-crisis levels in most OECD countries. Growth impulse, if it is going to be there, will have to come from the emerging economies. But here as well, we encounter problems which retard recovery. The current political turmoil in Brazil is as much an effect of the Great Recession, especially the fall in commodity prices as it is due to corruption. Indeed, one could say that corruption in many emerging economies is pro-cyclical. In periods of the bubble in commodity prices, corruption grows. In Brazil, this is particularly striking. It was through the oil-price rise and the revenues it generated for Petrobras that the troubles began.
The pattern of high-commodity-prices–boom –corruption is followed by a collapse of prices, recession and then anti-corruption movements which become a serious reform platform. Venezuela has witnessed a collapse in its economy and turmoil in its politics, thanks to the oil price fall. Hugo Chavez won himself a hero’s position in Left-wing circles around the world. But all he was doing was to spend the oil wealth rather than invest it. The result is a predictable one. The seed corn is gone. A very similar situation has occurred in South Africa and Russia.
The most dramatic change of fortune is happening in Saudi Arabia. The idea that the Saudis would need to raise money in the bond market to finance budget deficit would have been unimaginable any time in the last 50 years. Once the economic strength is sapped, it may lead to political change as well. The Saudi regime has been able to buy peace from its growing young population by building a welfare state with ample subsidies and no question asked. That will have to change now and political unrest will follow inevitably.
Politics has also been disturbed from its stable predictable pattern in the developed countries. No one can deny that Donald Trump and Bernie Sanders are the products of the Great Recession. Rising inequality and the precariousness of employment have embittered many White Americans, and they want to support a change in politics even if it may not solve all their problems. Elsewhere in Europe—Spain, Italy, Greece, Portugal—radical parties of the Left and the Right have sprung up, reflecting the troubled economic times. In the UK, the current debate about being in or out of the European Union is also an echo of the years of austerity the country has suffered. After years of welcoming and benefiting from immigration from across EU, the resentment about immigration has been rising in the country. It is this more than any other economic factor which is at the root of the debate.
The question which remains to be answered is whether the new politics will affect the global economy in any serious way. There is a clear danger of a reaction against globalisation. Both Trump and Sanders dislike the Trans Pacific Partnership which is being negotiated. The opposition to the liberal economic order comes from the Left and the Right. It is the middle ground which was fashioned during the 1990s in the Western countries—the Third Way, as Anthony Giddens, the British sociologist called it—which is now being threatened. It could usher in a much more protectionist global economy than we have been used to.
If Donald Trump were to win, he may be protectionist but ready to expand the public budget unmindful of fiscal orthodoxy. Protectionism and fiscal Keynesianism can be happy bedfellows. The same may happen in European countries if the extreme parties of the Left or the Right win. We may break away from a globalised liberalised free trade and free capital movement climate to closed economies but expanding ones. With the economy depressed, politics may move in a commanding position to refashion global economy.
The author is a prominent economist and Labour peer.