It Isn’t the End of the World

Even major political turmoil no longer seems to affect most countries’ economies.

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Italy somehow goes without a ruling party government for three months. Britain’s government is only a little better off, with internal conflict and party bickering bringing Brexit negotiations to a halt. And let’s not even bring up all the dizzying turmoil from the White House and Congress in the United States. All of which should be shaking up these countries’ economies, with investors and corporate leaders feeling pretty nervous with every headline.

Only it isn’t. In one of the greater mysteries of the day, economies no longer seem to be at the mercy of governments in turmoil. At least not everywhere.

It wasn’t always like that, of course. One only has to go back to 2011 and the debt crisis in Greece and Italy that was brought about by dysfunctional politics—which then prompted a recession in the European Union a year later. Or, in 2013, when a premature decision by the US Federal Reserve to wind down its bond-buying program sent interest rates soaring and stunted economic growth for part of 2014. This time, though, experts say the world economy isn’t nearly as fragile as it was a half a decade ago after the financial crisis. “The global growth environment is different,” says Bill Stone, chief investment officer at the Philadelphia-based investment consulting firm Stone Investment Partners. He notes that the major world economies are all now growing, despite all the political hijinks.

Of course, some of the recent trade-war rhetoric may have slowed the US economy a little, Stone says. But because overall growth is so strong, the effect gets lost. In other words, just like a speeding car doesn’t come to a halt when it hits a small bump on the road, so an accelerating economy doesn’t collapse because of the minor effects of a trade tiff. More importantly, perhaps, the overall strength means there’s little imminent chance of the economy going into reverse. “The rhetoric isn’t putting us at risk of recession,” he says.

We also know that investors, who are crucial to the continued growth of any economy, don’t seem too worried lately. The stock market, which in many ways is a metric of the financial health of corporations, hasn’t gotten hurt by the political sideshows. What matters to investors in stocks and bonds is corporate earnings, which have gone from strength to strength. “We have all these headlines, yes, but we have [been having] a phenomenal earning season,” says Stone. As a result, investors are leaving their cash invested, which in turn helps the economy.

Investors and executives alike have also learned that many past scares were false alarms—they’re fatigued in terms of reaction. They’ve heard many Cassandras, but few concerns have materialized in the past few years. We all heard, for example, how Britain’s economy would collapse when the country voted to leave the EU. (It didn’t shrivel.) Likewise, business executives seem inured to political scandal, having boosted their investment in manufacturing equipment (machines that make things) to a level recently surpassing that seen at the height of the last boom, according to US government data. Meanwhile, US business hiring has continued apace, with the unemployment rate dipping to 3.8 percent in the first half of 2018, its lowest level since the year 2000. And industrial production keeps surging to new all-time record highs—contributing an annualized $2 trillion to the economy.

But perhaps most of all, the economy works well when governments do little. In other words, when politicians don’t get in the way of businesses, then the economy can grow. In fact, partisan bickering and the resulting tumult can help keep the politicians from doing any harm to the market system. “When politicians are busy fighting each other, then they are not interfering with the marketplace,” says David Ranson, director of research at the investment analysis firm HCWE & Co. “When that happens, then the economy can do its own thing and does much better as a result.”

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