It’s all about uncertainty. From the now very real prospect of a Trump presidency to the still greater likelihood of Brexit – which could in turn trigger a domino effect of Eurosceptic rebellion across Europe – rarely has the political landscape looked quite so turbulent, unpredictable and therefore threatening to economic stability as it does now.
What even just a few weeks ago had been regarded by markets as little more than tail risks are all of sudden real and present ‘dangers’. The breakup of the European Union, Donald Trump in the White House – these things may actually happen, and indeed seem to be getting more probable by the day.
With most economies still struggling to return to pre-crisis norms, and the business cycle in many of them already quite long in the tooth, uncertainty about the political future has again soared up the list of key business concerns, causing many companies to go into lock down mode.
Normally, recessions are caused by over-heating, and consequent central bank action to jack up interest rates. But with rates already at close to zero, and no sign whatsoever of a boom, this seems to be an economic cycle which almost uniquely could simply die of the political turmoil threatening to engulf it.
Don’t think that at least in Britain, the uncertainty will lift once the referendum is out of the way. Absent of an overwhelming Remain vote, which seems very unlikely, the referendum will resolve nothing. A narrow vote for remain will only further harden the divisions within the ruling Tory Party, making gainful government, whose wafer thin majority has already repeatedly fallen victim to backbench rebellion, all but impossible.
This post was published at David Stockmans Contra Corner on June 8, 2016.
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