While some observers might worry that the current global economic cycle is ending, Templeton Global Macro CIO Michael Hasenstab characterizes the slowing growth we are experiencing as a cyclical slowdown, not the end of the cycle. He is more concerned with the political vulnerabilities he’s seeing in the global economy today, and says the world’s increasing fragmentation due to populist policies is a major concern.

A World of Extremes

I’m often asked what I see as the biggest risks within the global economy. Today I would say it’s the extreme political landscape throughout many parts of the world. Rising frustrations due to factors such as immigration and income inequality have given rise to populism, both on the left and the right, which can lead to very dangerous and fiscally unsustainable economic policies. These populist policies promise a lot in the short term but can’t be delivered upon in the long term, and can saddle governments with large amounts of debt.

We’ve seen these dynamics bubble up time and time again. In the United States, we have trade frictions with China and the inability of Congress to pass a budget. The discord going on in the United Kingdom around Brexit and how to handle it is another example. And then there is the rising popularity of anti-European Union, anti-establishment parties, whether it be in Germany or Italy or Belgium, and the rejection of President Emmanuel Macron’s vision of an integrated Europe by the French.

My concern is that because the world is increasingly fragmented with many countries turning inward, it will be difficult to navigate a potential global shock. It’s going to be increasingly hard to achieve the same kind of coordinated policy response between central banks around the world that enabled us to get through the Global Financial Crisis in 2008-2009.