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Attacks on vital shipping traffic in the Red Sea strait by a determined group of militants in Yemen – the result of the Israeli-Hamas war in Gaza – are injecting a new dose of instability into a world economy already reeling from rising geopolitical tensions.
The risk of escalating conflict in the Middle East is the latest in a series of unexpected crises, including the COVID-19 pandemic and the war in Ukraine, that have hit the global economy like a bear’s paw, sending it off course and Leave a mark.
As if this was not enough, more instability is coming in the form of a wave of national elections whose consequences could be deep and long-lasting. More than two billion people will participate in the elections in nearly 50 countries, including India, Indonesia, Mexico, South Africa, the United States and 27 countries in the European Parliament. Overall, participants in the 2024 Election Olympiad account for 60 percent of the world’s economic output.
In strong democracies, elections are being held because distrust in government is growing, voters are deeply divided and there is deep and enduring concern over economic prospects.
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 to require exporters to convert foreign currency into rubles was likely aimed at boosting the ruble and depressing prices in view of Russia’s presidential elections in March.
The winners will determine key policy decisions affecting factory subsidies, tax breaks, technology transfer, the development of artificial intelligence, regulatory controls, trade barriers, investment, debt relief and the energy transition.
An election victory that brings angry populists to power could push governments toward tighter controls on trade, foreign investment and immigration. Such policies could lead the global economy to “a very different world to the one we’re used to,” said Dianne Coyle, a professor of public policy at the University of Cambridge.
In many places, stagnant incomes, declining standards of living, and rising inequality have led to skepticism about globalization. However, Ms Coyle said, “A world of shrinking trade is a world of shrinking incomes.”
And that raises the possibility of a “vicious circle,” as the election of right-wing nationalists is likely to further weaken global growth and harm economic fortunes, he warned.
Many economists have compared recent economic events to the 1970s, but the decade Ms. Coyle said was the 1930s, when political turmoil and financial imbalances “turned into populism and business decline and then extreme politics “
Next year is the biggest election in India. Currently the world’s fastest growing economy, it is trying to compete with China as the world’s manufacturing center. Taiwan’s presidential election in January is likely to heighten tensions between the United States and China. In Mexico, the vote will affect the government’s approach toward energy and foreign investment. And a new president in Indonesia could change policies on critical minerals like nickel.
Undoubtedly, the US presidential election will be the most important election ever for the world economy. Approaching competition is already influencing decision making. Last week, Washington and Brussels agreed to suspend tariffs on European steel and aluminum and American whiskey and motorcycles until after the election.
The deal enables President Biden to take a tough stance on trade deals while battling for votes. Former President Donald J. Trump, the presumptive Republican nominee, has supported protectionist trade policies and has proposed imposing a 10 percent tariff on all goods coming into the United States — a belligerent move that would inevitably prompt other countries to retaliate.
Mr Trump, who has repeatedly criticized authoritarian leaders, has also signaled he would withdraw from America’s partnership with Europe, withdraw support for Ukraine and take a more confrontational approach towards China.
“The election results could lead to far-reaching changes in domestic and foreign policy issues, including climate change, regulations and global alliances,” consulting firm EY-Parthenon concluded in a recent report.
The global economic outlook for next year is so far mixed. Growth remains slow in most corners of the world, and dozens of developing countries are at risk of defaulting on their sovereign debts. On the positive side of the ledger, the sharp decline in inflation is prompting central bankers to reduce interest rates or at least curb their rise. Lower borrowing costs generally encourage investment and home buying.
As the world continues to fragment into uneasy alliances and rival factions, security concerns in economic decisions are likely to loom even larger than before.
China, India and Turkey stepped up to buy Russian oil, gas and coal after Europe sharply reduced its purchases following Moscow’s invasion of Ukraine. At the same time, tensions between China and the United States have prompted Washington to respond to Beijing’s years of strong industrial support by providing heavy incentives for electric vehicles, semiconductors and other goods deemed essential to national security.
Drone and missile attacks in the Red Sea by the Iran-backed Houthi militia are another sign of growing fragmentation.
Over the past few months, there has been a rise in smaller players such as Yemen, Hamas, Azerbaijan and Venezuela that are seeking to change the status quo, said Courtney Rickert McCaffrey, a geopolitical analyst at EY-Parthenon and author of the recent study. Report.
“Even if these conflicts are small, they can impact global supply chains in unpredictable ways,” he said. “Geopolitical power is becoming more dispersed,” and this increases instability.
Houthi attacks on ships around the world in the Bab-el-Mandeb Strait at the southern end of the Red Sea – known as the Gate of Sorrow – have sent freight and insurance rates and oil prices soaring, while maritime traffic has been disrupted. Too many turns. Long and expensive route around Africa.
Last week, the United States said it would expand a military alliance to ensure the security of ships passing through this commercial route, through which 12 percent of global trade passes. This is the largest redirection of worldwide trade since Russia’s invasion of Ukraine in February 2022.
Klaus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the impact of the attacks had so far been limited. “From an economic perspective, we are not seeing a huge increase in oil and gas prices,” Mr. Vistesan said, although he acknowledged that the Red Sea attacks were “the most obvious near-term flashpoint.”
However, uncertainty has a bad effect on the economy. Businesses take a wait-and-see attitude when it comes to investments, expansion and hiring.
A mid-year survey by the World Economic Forum found, “Continued instability in geopolitical and geo-economic relations between major economies is of greatest concern to chief risk officers in both the public and private sectors.”
With continued military conflicts, an increasing incidence of extreme weather, and several major elections ahead, it is likely that 2024 will see more of the same.
