Are recent populist moves in New Zealand an indicator of trouble ahead? Not for the Kiwis, in our view. But these developments could point to challenges in countries where populism has greater traction.

The rise of populist sentiment has been front-page news in US and European politics—most recently with Catalonia’s fight for independence from Spain. But recent developments in New Zealand show that populism has a long reach globally.

Three Themes to the Populist Agenda

The root causes of populism’s rise run deep, and we think populism will stick around for a while. It’s relatively easy to hurl the “populist” term at a political opponent, and to agree on its definition (including railing against the “elites” and attacks on the media). However, it’s much harder to draw a bead on populism’s policy ramifications.

As we’ve outlined before, the broad populist policy agenda boils down to three broad themes. Over the medium term, the impacts of these themes may prove crucial for investors—and they all point toward structurally higher inflation down the road.

1) Raising the drawbridge. First, we’re on the lookout for policy initiatives that move toward deglobalization. They’ve been easy enough to spot: the UK’s Brexit vote, the US withdrawal from both the Paris Climate Accord and Trans-Pacific Partnership, and the Trump administration’s renegotiating of NAFTA.

2) Redistribution. This type of policy was common in Latin America’s populist experience. Redistribution is less obvious than deglobalization in the current environment, but we’ve already seen a global attitude shift on the use of fiscal policy (the “austerity no more!” cry).

3) Institutional erosion. Attacks on the media are one example, as are government attacks on state institutions, bureaucracy, the judiciary, parliamentary arrangements and other institutions. A key risk is undermining central bank independence with money-financed fiscal stimulus.

Populist Leanings in New Zealand

It doesn’t take a big political leap to get the policy ball rolling toward populism—and it doesn’t require a wild-eyed authoritarian to take power. That’s because mainstream political parties are already refashioning their manifestos to counter the populist challenge to some degree.

Take the recent change in New Zealand’s government, with the Labour party assuming power for the first time in nearly a decade. Labour’s ascension is thanks to the party’s coalition agreement with New Zealand First (NZ First), the country’s nationalist and populist political party.

To be clear, we’re reluctant to call this a “populist” government. NZ First has formed coalitions with both sides of politics as far back as the introduction of the mixed-member proportional voting system in 1996. In a sense, the government looks pretty mainstream—not out of kilter with historical precedent.

But we already see movement along all three populist policy themes. Immigration seems likely to be trimmed, and restrictions on foreign purchases of New Zealand’s real estate are expected. Minimum wages will probably be boosted and fiscal policy eased. The Reserve Bank of New Zealand will also have a new mandate—adding a full-employment objective to its inflation target.

None of these developments imply that populism is taking a tight grip in New Zealand, or that an inflation surge is just around the corner. Each development is minor in the grand scheme of things, and New Zealand’s overall macroeconomic policy settings are likely to remain sound.

But we think the Kiwi story is a great example of how the populist political thrust is likely to continue shifting the mainstream policy debate—even in parts of the world that are many miles from “fake news” headlines. Investors should take note of the potential for an inflation resurgence as this happens.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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