Populism paradoxically is failing to reverse the factors that led to its rise, and in many cases threatens to worsen conditions. While citizens in parts of the developed world have been successful at ushering in change, it’s not clear that these changes will achieve the desired ends – chiefly because the unorthodox approaches that many of the world’s populist leaders have chosen go against the grain of what has worked throughout economic history.
Perhaps that's the point, and with economies languishing, the world is in need of new orthodoxy. Yet this remains an open question, and in the meantime investors should be skeptical that populism can solve the world's growth and income problems.
We see three main facets to this Populism Paradox:
- Governance. While citizens of the developed world are demanding more activist governments, they are choosing independent-minded and politically inexperienced candidates whose ability to govern is constrained by entrenched political establishments and constitutional checks and balances.
- Trade. Voters want more of what they consume to be produced domestically, and they want to sell more of what they produce to the rest of the world. Yet by selecting candidates who are looking inward, they may unwittingly stymie their ability to achieve these ends.
- Investing in growth. Nations increasingly recognize that their inattention to investments in proven long-term growth drivers – such as infrastructure and education – is constraining economic growth. Yet populists are supporting candidates who, fearing a backlash from the electorate, are hesitant to redirect their nations’ resources away from social programs to fund these investments. This is in part due to the growing “gerontocracy,” or rule by the aged, with senior citizens representing major voting blocs with the power to remove politicians from office if their social programs are threatened. This is a generational conflict with major implications.
Can populism spur growth?
In short, the populist leaders whom citizens have chosen as proxies to reach numerous ends – faster income growth and stronger national identity are two prominent examples – often lack both the means and a clear path to achieve these ends.
Developed nations may be poised to achieve continued economic growth that could well accelerate this year and next, owing to a modicum of fiscal engagement. However, the current policy path will most likely fail to result in a permanent increase in the economic growth trajectory, with productivity continuing to languish over the secular (three- to five-year) horizon. (We recognize that productivity could surprise to the upside as cutting-edge technologies are more broadly adopted in manufacturing, but that is not our base case.)
Investors therefore should continue to expect a benign global interest-rate climate, with market prices distorted by heavy – if gradually decreasing – central bank activism. Central banks cannot foster economic growth over the long run. A failure of populism to produce faster growth would lend support to PIMCO's New Normal and New Neutral frameworks of low central bank policy rates and lower investment returns than historically.
Unless and until the populist movement yields policies that focus on the long-term drivers of economic growth, it may paradoxically result in more of the very outcomes that gave rise to populism in the first place.
For more insights into the range of potential policy pivots driving uncertainty in the global economy and testing markets over the next three to five years, please read PIMCO’s 2017 Secular Outlook, “Pivot Points.”
Tony Crescenzi is a market strategist and generalist portfolio manager and is a member of PIMCO’s Investment Committee. He is a frequent contributor to the PIMCO blog.