Editor’s Note: This week’s edition is abbreviated from its normal length, due to the upcoming long weekend. For those celebrating July 4^th, we wish you a nice holiday.  For those of you in the U.K. who are voting on July 4^th, we wish you wisdom.

By Vaibhav Tandon

This year has been marked by an usually large number of impactful elections, with more to come. By the end of 2024, balloting covering more than 40% of the world’s population and over half of global output will have taken place. 

Over a billion people around the globe have already voted in this history-making year. It has been a very difficult cycle for moderates and incumbents:

• Far-right parties have gained in the European parliament.
• French President Emmanuel Macron will find governing difficult amid the polarization evident in last Sunday’s voting. 
• The Conservative Tories in the U.K. are staring at a massive defeat on July 4th, after 14 years in power.
• South Korea’s main liberal opposition party won a landslide victory in the nation’s parliamentary elections.

Even in places where ruling parties have retained power, their support has diminished.  In India, prime minister Modi now heads a coalition government after losing an outright majority for the first time in a decade.  South Africa’s African National Congress lost its parliamentary majority for the first time since the end of Apartheid.

Immigration, trade and the elevated costs of living have been central issues among voters, especially in the developed world.  Candidates advocating a more nationalist approach to these topics have fared very well. More restrictions on the flow of people and products are likely in the years ahead. This will create special challenges for the European Union, whose members are struggling to reach consensus on border security and international commerce.

Globally, the specter of rising tariffs looms large.  Former president Trump has proposed a 10% surcharge on all goods arriving into the U.S. and a 60% tariff on Chinese imports.  Measures like these would exacerbate trade conflicts, fragmentation and destabilize an already shaky world economic order.

The risks to public finances in this election year are also particularly acute.  Empirical evidence shows that fiscal policy tends to be looser during election years.  Analysis of more than 1,100 elections in 152 countries shows that primary fiscal balances as a share of gross domestic product (GDP) decline by about 0.4 percentage points on average in election years.  

This will not help with efforts to restore fiscal balance in the longer term.  Government debt and deficits have soared in recent years amid rising interest burdens and the costs of energy transitions, industrial policies and defense spending. Parties gaining ground in this year’s elections have proposed higher spending, which could create financial and political stress.

According to the International Monetary Fund, even a modest fiscal tightening over the medium term will not be enough to stabilize public debt across several economies.  Larger fiscal adjustments than those currently predicted will be needed for attaining fiscal sustainability and rebuilding buffers. These would certainly be politically unpalatable.

In a report released last week, the Bank of England warned that the uncertainty caused by a global elections could create economic and market instability. The mere presence of uncertainty hinders international investment, which hinders growth. Election outcomes in Mexico and France had a pronounced impact on currency values and borrowing rates.

These outcomes increase the market’s nervousness as we approach the November election in the United States.  Politics will remain a key driver of economics in the second half of the year.