Thursday, July 25

The blocking of shipping in the Red Sea is the latest risk to the global economy

Attacks on crucial shipping traffic in the Red Sea strait by a determined band of militants in Yemen – a consequence of the war between Israel and Hamas in Gaza – are injecting a new dose of instability into a world economy already grappling with growing geopolitical tensions.

The risk of escalating conflict in the Middle East is the latest in a series of unpredictable crises, including the Covid-19 pandemic and the war in Ukraine, which have struck like bear claws. global economy, throwing it off course and leaving scars.

As if that weren’t enough, more volatility lies ahead in the form of a wave of national elections whose repercussions could be profound and long-lasting. More than two billion people will go to the polls in around 50 countries, including India, Indonesia, Mexico, South Africa, the United States and the 27 nations of the European Parliament. Overall, Olympic participants in the 2024 elections represent 60% of global economic output.

In robust democracies, elections take place as distrust in government grows, voters are bitterly divided, and there is deep and abiding anxiety about the economic outlook.

Even in countries where elections are neither free nor fair, leaders are sensitive to the health of the economy. President Vladimir V. Putin’s decision this fall to require exporters to convert foreign currency into rubles was likely made with the aim of supporting the ruble and keeping prices down ahead of Russia’s presidential election in March.

The winners will determine crucial policy decisions affecting factory subsidies, tax breaks, technology transfers, artificial intelligence development, regulatory controls, trade barriers, investment, debt relief and the energy transition.

A wave of election victories that bring angry populists to power could push governments toward tighter control of trade, foreign investment and immigration. Such policies, said Diane Coyle, a professor of public policy at the University of Cambridge, could transform the global economy into “a very different world to what we are used to.”

In many places, skepticism about globalization has been fueled by stagnating incomes, declining living standards and growing inequality. Nonetheless, Coyle said, “a world of declining trade is a world of declining incomes.”

And that raises the possibility of a “vicious cycle” because the election of right-wing nationalists is likely to further weaken global growth and damage economic fortunes, he warned.

Many economists have compared recent economic events to those of the 1970s, but the decade that Coyle says comes to mind is the 1930s, when political upheaval and financial imbalances “resulted in populism, decline of trade and then extreme policies.”

Next year’s most important elections will be held in India. Currently the world’s fastest growing economy, it is struggling to compete with China as the world’s manufacturing hub. Taiwan’s presidential election in January could increase tensions between the United States and China. In Mexico, the vote will influence the government’s approach to energy and foreign investment. And a new president in Indonesia could change policies on critical minerals like nickel.

The US presidential election, of course, will be by far the most significant for the world economy. The upcoming competition is already influencing decision making. Last week, Washington and Brussels agreed to suspend tariffs on European steel and aluminum, American whiskey and motorcycles until after the election.

The deal allows President Biden to appear tough on trade deals as he fights for votes. Former President Donald J. Trump, the likely Republican nominee, advocated protectionist trade policies and proposed imposing 10% tariffs on all goods entering the United States — a combative move that would inevitably lead other countries to retaliate.

Trump, who has echoed authoritarian leaders, has also indicated he will step back from America’s partnership with Europe, withdraw support for Ukraine and pursue a more confrontational stance toward China.

“The outcome of the election could lead to far-reaching changes in domestic and foreign policy issues, including climate change, regulations and global alliances,” the consultancy EY-Parthenon concluded in a recent report.

The global economic outlook for next year is mixed so far. Growth in most corners of the world remains slow and dozens of developing countries are at risk of defaulting on their sovereign debts. On the bright side, the rapid decline in inflation is pushing central bankers to reduce interest rates or at least slow growth. The reduction in financing costs is generally a stimulus to investments and home purchases.

As the world continues to fracture into uneasy alliances and rival blocs, security concerns are likely to loom even larger in economic decisions than they have so far.

China, India and Turkey have turned to buying Russian oil, gas and coal after Europe slashed its purchases following Moscow’s invasion of Ukraine. At the same time, tensions between China and the United States have pushed Washington to respond to years of strong industrial support from Beijing by providing huge incentives for electric vehicles, semiconductors and other goods deemed essential to national security.

Drone and missile attacks in the Red Sea by Iran-backed Houthi militias are a further sign of growing fragmentation.

Over the past two months, there has been a rise in smaller players like Yemen, Hamas, Azerbaijan and Venezuela who are trying to change the status quo, said Courtney Rickert McCaffrey, a geopolitical analyst at EY-Parthenon and author of the recent report.

“Even if these conflicts are smaller, they can still affect global supply chains in unexpected ways,” he said. “Geopolitical power is becoming increasingly dispersed,” which increases volatility.

The Houthi attacks on ships around the world in the Strait of Bab-el-Mandeb – the Gate of Sorrow – at the southern end of the Red Sea, have increased freight rates, insurance rates and the price of oil, diverting the at the same time maritime traffic to a much larger area. longest and most expensive route around Africa.

Last week, the United States said it would expand a military coalition to ensure the safety of ships transiting the trade route, through which 12% of global trade passes. This is the largest hijacking of global trade since Russia’s invasion of Ukraine in February 2022.

Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said the impact of the attacks had so far been limited. “From an economic point of view, we are not seeing a huge increase in oil and gas prices,” Vistesen said, while acknowledging that the Red Sea attacks were “the most obvious short-term flash point.”

However, uncertainty has a dampening effect on the economy. Businesses tend to adopt a wait-and-see attitude when it comes to investments, expansions and hiring.

“Continued volatility in geopolitical and geoeconomic relations between major economies is the greatest concern for Chief Risk Officers in both the public and private sectors,” a mid-year survey by the World Economic Forum found.

With persistent military conflicts, increasing incidents of extreme weather, and a series of major elections ahead, 2024 is likely to bring more of the same.