Once upon a time, elections were dominated by the economic cycle. “It’s the economy, stupid” became Bill Clinton’s maxim, and one which all politicians could follow.
If growth was good and unemployment low, the ruling party was typically a shoo-in, while a recession would lead to a hasty exit for the government of the day. Simple.
Suddenly the world works in the other direction – the economy is dominated by elections.
Geopolitical risk, the catch-all term for anything from elections to wars, is now in the driving seat.
The big event of the summer was June’s Brexit referendum. Apocalyptic forecasts of an immediate crash for the UK economy have not come true so far, thankfully, with the earliest indicators pointing to robust growth.
After all, Britain’s exit from the European Union has not yet occurred. The vote has implications for the rest of the EU and for world trade, with the outcomes far from certain. A slowdown seems likely.
Next up is the US presidential election in November when Hillary Clinton clashes with Donald Trump.
As far as financial markets are concerned, the outcome broadly matches the politicians’ own campaign – Clinton is a known quantity while Trump wants a radical new approach.
Trump inexpicably even drew a mysterious equivalence between himself and the Brexit referendum with this cryptic tweet
As an outsider once seen in Washington as a joke, Trump’s election is not now unthinkable – a little like Brexit, which was dismissed as impossible by chunks of the political elite even on the eve of the vote.
The votes have some similarities. Here are the key economic risks.
Core to Trump’s campaign is a scheme to set the US apart from the world, closing borders and protecting local industries.
As a pitch to blue-collar workers it seems successful – those who worked in manufacturing and have seen their pay packets squeezed or their jobs lost have a clear grievance with cheap imports.
Globalisation has also been an enormous force for good in the global economy, however, with the rise of emerging markets massively boosting growth. Even workers who feel they have lost out from world trade have benefited through cheaper goods and greater choice, whether it be on the supermarket shelf, the technology in their homes or travel choices.
Extra barriers to trade with China in a bid to make US-manufactured goods more competitive would harm other Americans directly, driving up costs and cutting choice and quality.
Shutting down trade growth would dent growth in the US and the rest of the world – it is a major risk of a Trump Presidency.
In contrast, Brexit’s impact is more nuanced. The outcome of trade talks with the EU are far from certain, though there are clear risks. Britain will lose out if exports are subject to EU tariffs, while EU customers will suffer if they pay the tax. The market for services is more significant for the UK, as the City of London needs EU customers, and they need the City.
But there is another side to the coin – the rest of the world. Outside the EU, Britain may create its own trade deals.
Again these are uncertain and will take time to negotiate. The long-term potential is for a powerful boost to trade with countries including China, India and the US, and the Government seems keen to embark on those discussions as quickly as possible.
There is clear room for gains from Brexit, if negotiations go well – Trump’s policies, by contrast, appear more negative for the world.
Trump’s most famous policy is to build a giant wall across the US-Mexico border. His idea to ban Muslims from entering the US is also an eye-catcher.
Economically speaking, migration is a big positive. Extra resources mean more growth, and allowing workers to move to the best-paying jobs means more value is created, benefiting workers, employers and customers. Large-scale migration is not always popular in the host communities, however, turning a boon in the economics textbooks into a real-life political battleground.
The risks posed by Brexit and Trump are similar. More than 2 million EU workers are employed in Britain currently even as unemployment has tumbled to below 5 per cent. While a crackdown on non-EU migration means the number of workers from the rest of the world has held relatively flat in recent years, strong growth in the UK economy has sucked in workers from across the EU.
Cutting off that supply would choke off growth, harming the UK just as much as Trump’s would harm the US.
Security concerns loom large. Trump has questioned whether or not America’s Nato allies have “fulfilled their obligations to us”. If not, he hints, the US may not come to their aid.
At a time when Russia is rampant in Ukraine and active in Syria, this is not reassuring to countries in the Baltics, and clearly economies can only thrive in peaceful conditions.
Leaving the EU poses fewer risks.The EU has few centralised defence arrangements. Britain will remain in Nato and, as a former home Secretary, Theresa May is keen to keep joint operations to fight crime and terror.
Fears of nuclear war largely faded with the end of the Cold War so it almost feels like a joke, or perhaps the scare-mongering of the most partisan Clinton fan, to mention the ultimate weapons of mass destruction.
Yet it is it is Donald Trump who reportedly asked for reasons he should not use them, since the US has a large stock. The idea is unimaginable with any other candidate, as the deterrent has remained untouched for decades.
Even if he was elected, the use of nukes seems wildly implausible, but the fact that the idea can be discussed shows his extraordinary unpredictability and so illustrates the outright fear his election could create.
Brexit was a surprise to markets and is likely to dent the economy. Yet in the long term there are a range of ways it could end up enhancing economic growth, assuming level politicians in London and Brussels play straight with each other.
President Trump would be far more of a wild card, and his stated goals are so damaging to foreign economies – and ultimately his own – that clearly the biggest geopolitical risk of the year is yet to come.
If he really did win power and enact some of those policies, the importance of “the economy, stupid” would reassert itself brutally quickly.