With two wars and 50 elections, the economy faces rising geopolitical risks

LONDON — In an echo of the war between Israel and Hamas in the Gaza Strip — attacks on key shipping by a group of hardline Yemeni fighters in the Red Sea Strait are injecting another dose of instability into the global economy. Struggling with rising geopolitical tensions.

The risk of escalating conflict in the Middle East is the latest in a series of unpredictable crises, such as the Covid-19 pandemic and the war in Ukraine, which are bearing down on the global economy like bear paws, derailing it. Its trend and left scars.

As if that were not enough, there is more volatility on the horizon due to a wave of national elections, the consequences of which will be deep and long-lasting. More than two billion people will go to the polls this year in about 50 countries, including India, Indonesia, Mexico, South Africa, the United States and 27 countries of the European Parliament. In total, participants in the 2024 Electoral Olympiad account for 60 percent of global economic output.

In strong democracies, elections take place at a time when mistrust of government is rising, voters are deeply divided, and there is deep and persistent concern about the prospects for the economy.

Even in countries where elections are not free or fair, leaders worry about the health of the economy. Perhaps President Vladimir Putin made the decision this fall to require exporters to convert foreign currency into rubles to shore up the Russian currency and lower prices ahead of Russia's presidential election in March.

The winners will make important policy decisions that will affect industrial subsidies, tax breaks, technology transfers, development of artificial intelligence, regulatory controls, trade barriers, investments, debt reduction and energy transition.

A wave of electoral victories that bring angry populists to power will prompt governments to impose stricter restrictions on trade, foreign investment and immigration. Diane Coyle, a professor of public policy at the University of Cambridge, said such policies would tilt the global economy toward “a very different world from the one we're used to.”

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

He warned that this raises the possibility of falling into a “vicious circle” as the election of right-wing nationalists could further weaken global growth and damage the future of the economy.

Many economists have compared recent economic developments to the growth of the 1970s, but the decade Coyle remembers was the 1930s, when political upheavals and financial imbalances gave rise to “populism, contraction of trade and, finally, radical policies.

India will have its biggest election next year. Currently the world's fastest growing economy is trying to compete with China as the world's manufacturing hub. Taiwan's presidential election in January could heighten tensions between the US and China. In Mexico, elections will determine the government's approach to energy and foreign investment. In addition, Indonesia's new president could change policies regarding more important minerals such as nickel.

Of course, the presidential elections in the United States will be very important for the global economy. Approaching competition is already influencing decision-making. Last week, Washington and Brussels agreed to suspend tariffs on European steel and aluminum and US motorcycles and whiskey until after the election.

The deal sends a message that President Joe Biden has taken a firm stance on trade deals amid a contested election. Former President Donald Trump, the Republican nominee, has championed protectionist trade policies and proposed a 10 percent tariff on all goods entering the United States, a move that would inevitably prompt retaliation from other countries.

Following authoritarian leaders, Trump has signaled that he will scale back US partnerships with Europe, scale back support for Ukraine and take a more confrontational stance toward China.

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

So far, the outlook for the global economy next year is mixed. In much of the world, growth remains sluggish and dozens of developing countries are at risk of defaulting on their sovereign debt. On the positive side of the balance, a rapid decline in inflation prompts central banks to cut interest rates or at least reduce their hikes. Lower borrowing costs always spur investment and home buying.

As the world continues to fracture into uneasy alliances and rival camps, security issues will affect economic decisions more than they ever did.

China, India and Turkey increased their purchases of Russian oil, gas and coal after Europe cut back sharply after Moscow invaded Ukraine. At the same time, tensions between China and the U.S. have prompted Washington to respond to Beijing's longstanding strong support for the industry by offering huge concessions on electric vehicles, semiconductors and other goods deemed critical to national security.

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

In recent months, smaller players like Yemen, Hamas, Azerbaijan and Venezuela have joined and are trying to change the established order, said Courtney Richard McCaffrey, a geopolitical analyst at EY-Parthenon and author of the latest report.

“Even if these conflicts are minor, they can still affect global supply chains in unexpected ways,” he said. “Geopolitical power is dissipating,” and that contributes to instability.

Houthi attacks on ships around the world in the Bab el-Mandeb strait (known as the Gate of Tears) in the southern part of the Red Sea have raised cargo and insurance rates and oil prices, while affecting shipping. will be diverted to a much longer and more expensive route around Africa.

Last week, the United States indicated that it would expand a military alliance to guarantee the safety of ships passing through the trade route. It is the biggest diversion of global trade since Russia's invasion of Ukraine in February 2022.

“Sustained volatility in geopolitical and geoeconomic relations between major economies remains a major concern for risk managers in the public and private sectors,” said a mid-term study by the World Economic Forum.

With ongoing military conflicts, increasing extreme weather and several key elections looming, 2024 is likely to bring more of the same.