Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites.
Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. For avoidance of any doubts and to make it easier, you may consider any links to external websites as sponsored links. Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

Hermes: Overly protective

In his latest Quarterly Economic OutlookNeil Williams, Senior Economic Adviser to Hermes Investment Management, argues that markets are still taking a ‘glass half full’ view of the macro outlook, with little real consideration of the new risk emerging. 

Until now, this has made sense, with speculation the US would open the fiscal box having justified ‘reflation trades’. However, while better for growth (see chart 1), markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust with the threat of beggar-thy neighbour policies – from the US to anti-European populism – rising.

 2018 could be a ‘year of two halves’… 

In which case, 2018 could be a year of two halves, where stimulus- euphoria gradually gives way to stagflation concern. Helpfully, the trade-off is that policy rates stay lower than many expect.

As chart 2 attests, the world’s appetite for international trade has, as a share of GDP, more than doubled in the past 50 years. Nevertheless, without care, the unhelpful jigsaw piece of retaliatory protectionism from the 1930s, might come crashing into place.



In 1930, it was triggered by the Smoot-Hawley reforms that raised US tariffs to up to 20% on over 20,000 imported goods. This hit the US’s relatively small number of trading partners, most notably Canada and Europe, and prolonged the depression.

The impact of protectionism this time would be more complicated than the 1930s. First, economic and financial linkages suggest the knock-on would be more far reaching. Global retaliation would activate second-order effects that later offset the growth impulse from President Trump’s tax cuts.

Second, the deflationary return to the US could be much larger than anticipated. China’s commitment to US Treasuries would be questioned, supply chains for US corporates disrupted, and the US’s already shrinking labour supply and potential growth reduced further.

Third, should protectionism build, inflation will reappear. However, with the possible exception of the US, it will be the ‘wrong sort’ of inflation – cost, rather than demand led. Central banks will turn a blind eye as economies stagflate, so the inflation flame may snuff itself out.

 Even in the US, true real policy-rates will stay negative…
In which case, ‘loose for longer’ probably has years left to run. Even in the US, true real policy-rates (adjusted for QT) will stay negative, with peak rates much lower than we’re used to.

Therefore, the question after nine years of QE is, how do central banks turn off the taps without unintended consequences? Their skin in the game suggests they cannot take us off guard. In the 1930s – the only real comparator – US QE ran unbroken for 14 years.

Whilst that was a different time, if it is any indicator, should protectionism come again it may mean we are little more than half-way through this current era of cheap money.