What to expect from this year's global election cycle

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Geopolitics, fiscal policy and institutional resilience will be key considerations in elections this year, writes Taylor Pearce, senior economist, OMFIF’s Economic and Monetary Policy Institute.

Rising geopolitical tensions, constrained fiscal policy and institutional resilience under pressure – as half of the world’s population heads to the polls in 2024, these are the key considerations surrounding this year’s global election cycle.

When it comes to analysing political risk and the potential influence of political developments on global markets, this year marks something of a paradigm shift. This edition of the Bulletin looks at the implications of this super-election year for both developed and emerging economies and what we can expect for the world economy as a whole.

As Elliot Hentov, head of macro policy research at State Street Global Advisors, notes, historically, ‘elections mattered mostly in newly democratic states, where they posed risks to domestic stability and also represented a potential for dramatic policy shifts’. But now, ’Political risk – not only potential policy shifts but full-on policy reversals – institutions’ frameworks, political stability as well as position in the global order can now also be at stake in mature democracies.’

Against this backdrop, what’s at stake in the forthcoming elections?

For some contributors, geopolitics is at the top of the agenda. As the European Parliament elections approach, ‘formulating a comprehensive industrial policy akin to “Made in China 2025” or the US Inflation Reduction Act’ will be imperative for the competitiveness of Europe’s economy, writes Geoffrey Yu, senior strategist at BNY Mellon.

At the global level, ‘Stressed US-China relations could further raise military tensions, propelling fragmentation and protectionism,’ observes OMFIF US Chair Mark Sobel. ‘US presidential elections and the possible return of Donald Trump are one clear threat to what remains of the rules-based international order.’

Some markets look to benefit from geopolitical realignments. There is optimism over nearshoring prospects in Mexico, though its new leader will need to put in place structural reforms to take advantage of this opportunity, states Nikhil Sanghani, managing director of OMFIF’s Economic and Monetary Policy Institution. ‘The next government’s policies will have a major bearing on whether Mexico’s economy will reap the full rewards of nearshoring.’

For others, fiscal policy is the main concern of this election cycle. In South Africa, despite calls for further social spending, fiscal expansion will be ‘weighed against an economic reality in which tax revenues are under pressure and where spending on debt service is now a larger expenditure item than policing, public healthcare or even basic education,’ explains Jeff Gable, head of macro and fixed income research at Absa.

In India, Jeremy Zook, director, Asia sovereign ratings at Fitch Ratings, writes that ‘addressing fiscal weaknesses and rebuilding buffers will be a key challenge for the next government, but it is unclear how much priority this will be given.’ For the incumbent Modi government, which looks likely to return, fiscal consolidation will conflict with ambitions to increase infrastructure spending.

Meanwhile, in Indonesia, uncertainties abound regarding government financing, expenditures and revenue, note Johanna Chua, head of emerging market economics at Citi Global Markets Asia, and Helmi Arman, Indonesia chief economist at Citi Global Markets. They anticipate that ‘the new administration’s choice for finance minister would be closely watched by bond investors.’

Fiscal policy and government debt sustainability are not just emerging market concerns. In the UK, government debt is mounting and fiscal space shrinking. A Labour government will be hard-pressed to deliver on promises around infrastructure and sustainability, argues Andrew Pilgrim, UK financial services partner at EY. A returning Conservative government would continue to wrestle with competing objectives of fiscal responsibility and net-zero pledges.

Finally, the strength of institutions will be key to maintaining stability, and this year’s elections will test the resilience of economic and political institutions in many jurisdictions. For Peter Sedgwick, former senior UK Treasury official, whoever leads the UK will need to ‘review the institutional arrangements for monetary and fiscal policy following problems and failings in recent years.’

Christopher Smart, managing partner at Arbroath Group, argues, ‘The investment case for the US ultimately depends on the strength of its institutions.’ With the US likely to become ‘more confrontational, protectionist and insular’, he anticipates that investors will need to ‘assess if the American institutions that have mostly managed to keep political excess in line so far will withstand the current turmoil’.

And in Europe, how the new European Parliament rises to meet the challenge of growing populism in its member states ‘will determine Europe’s resilience in an increasingly deglobalised and supply-stricken world,’ Yu notes.

With no end in sight to the war in Ukraine and the conflict in the Middle East risking further escalation, it’s clear the era of peace dividends is over. The outcome of this year’s elections have the potential to compound market tumult. With this in mind, policy-makers and markets should brace for even more uncertainty and volatility in 2024.

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