When examining the interplay between politics and the economy, one might assume that political stability and consensus are prerequisites for economic prosperity. However, the evidence suggests that the economy and stock market are often quite resilient to political turbulence.
The United States serves as a prime example. Over the past two decades, and especially in the last five years, the US has been the standout economy in the developed world, with a rate of GDP growth and innovation that has far exceeded Europe and other developed nations. This economic performance has occurred amidst a backdrop of highly polarised politics, marked by the rise of the Tea Party movement, the presidency of Donald Trump, and the most extreme political divisions seen in the US in a century.
Despite this intense political drama, the US economy has continued to thrive. Technological innovation has been a significant driver, with American companies like Apple, Google, Amazon, and Tesla leading in innovation in electronic products, cloud computing, AI, and electric cars. These companies have not only revolutionised their respective industries but have also contributed significantly to GDP growth in the US and job creation. The stock market has also reflected this economic strength, with major US indices like the S&P 500 and NASDAQ reaching record highs this year and significantly outperforming European and other developed world markets.
The experience of the United States suggests that the economy and stock market are influenced more by underlying economic fundamentals than by political events. Factors such as technological innovation, consumer spending, corporate profits, and global economic conditions play a more crucial role in determining economic performance than political headlines.
The situation in Germany offers a contrasting example. Germany has experienced relatively stable politics over the last decade, characterised by centrist leadership and a broad consensus on many economic policies. Despite this political stability, Germany has lagged behind other developed nations in terms of economic growth. The German economy has struggled with issues such as an aging population, a reliance on traditional industries like automotive manufacturing, and a slower pace of technological innovation. More recently its strategic blunder in relying on Russian supplied natural gas to power its economy was revealed as folly. Unlike the US, Germany has not produced many globally dominant tech companies in recent years, highlighting that political stability alone is not a guarantee of economic dynamism.
History provides other examples that underscore the limited impact of political conditions on economic outcomes for many economies. Post-World War II France experienced extreme political upheaval, including mass protests, the war in Algeria, and frequent changes in government. Despite these challenges, France enjoyed exceptional economic growth during this period, often referred to as the “Trente Glorieuses” or “Thirty Glorious Years”. This era of rapid economic expansion was driven by industrial modernisation, infrastructure development, and increased productivity, illustrating that economic fundamentals can often override political instability.
Of course, politics does matter to some extent. Political decisions can shape economic policy, regulation, and public investment, which in turn can affect economic performance. Very poor political leadership can indeed harm an economy, as evidenced by Argentina’s struggles with hyperinflation, debt crises, and economic mismanagement. In such cases, political dysfunction directly undermines economic stability and growth.
However, in developed economies with strong institutional frameworks, the economy and stock market can often weather political storms. The key is that political leaders do not severely mismanage the economy. Even seemingly extreme political events like Brexit or the election of Donald Trump have not derailed the overall trajectory of the economies involved. In the case of Brexit, while there have been significant economic challenges and uncertainties, the UK economy has not collapsed and continues to function, adapting to new trade realities and opportunities. Similarly, the Trump administration’s tenure saw significant policy shifts, but the US economy continued to grow, driven by the same underlying strengths that have propelled it for decades.
So, while politics can influence the economy, it does not necessarily dictate economic outcomes. The resilience of the economy and stock market in the face of political turbulence is a testament to the strength of underlying economic fundamentals. Technological innovation, consumer behaviour, corporate performance, and global economic trends often have a more significant impact than political events.
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