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How Populists Can Ruin a Global Recovery

https://finance.yahoo.com/news/popul...153636077.html

The IMF says the return of central bank accommodation has helped to ease financial conditions. The U.S. Federal Reserve has stopped raising interest rates since December, as there is no sign inflation is overheating in spite of a robust labor market. The European Central Bank in March pushed back its first interest rate rise until at least next year, as it launched a new program of cheap loans to banks.

These decisions – however wise – are a sideshow to the real risks facing the world economy. Gone are the days when central bankers were the masters of the universe, with the power to lift the global outlook if only they deployed the right instrument. The election of populist administrations, from the U.S. to Italy, has put politicians back at the center of the economic scene and, unfortunately, not for good reasons.

The IMF identifies three main areas where politicians have the potential to do serious harm to the global economy. The first is global commerce: President* Donald Trump has already caused havoc in the financial markets with his trade confrontation with China. He is now threatening to do the same with the EU. Trade wars do not just put a brake on the growth of exports, as foreign demand collapses. They also undermine confidence generally, leading to lower business investment. While central banks can ease monetary policy to encourage companies to borrow, this is insufficient so long as uncertainty persists. As the economy slows, the labor market also cools, putting a further brake on internal demand.