After a fairly tumultuous 2016, current political uncertainties will likely make 2017 equally unpredictable. So, at this stage, it would be highly speculative to attempt to predict what a “hard” Brexit as pursued by Theresa May would imply, or to anticipate what the Trump victory ultimately portends following his first controversial executive orders that appear to confirm the fears associated with his election. In Europe, crucial elections lie ahead in the Netherlands, France, Germany and possibly Italy, which will provide key tests for populist movements but also impact the future of the EU. Added to this are various other geopolitical risks, above all in China, which is preparing for a major leadership transition under President Xi Jinping. All these factors could potentially have far-reaching consequences for economic policies, the macro-financial environment, political stability and, last but not least, country sustainability developments around the globe.
Regardless of how things develop in Europe and the US, it is now clear that developed countries have replaced emerging markets as the main source of political risk. According to the IMF’s recently published World Economic Outlook update, political risk in advanced economies is one of the biggest threats to global growth. Indeed, political trends over the past few years indicate that the era of relative stability and predictability in major advanced economies is over.
The rise of populism and nationalism found its expression in the rapid dissemination of anti-establishment, anti-globalization and anti-immigration sentiment, crystallizing into “shocks” such as Brexit and Trump’s victory. Increasing populist pressures have already begun to influence policy agendas in many Western countries and will likely continue to redirect economic policy towards reinforcing domestic labor markets, protectionism, and tightening immigration rules − precisely the political platform that led to the election of the new US President Trump (see Figure 1).