Shutdown of Red Sea shipping poses latest risk to global economy

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

The risk of an escalation of 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 on the global economy, sending it off course and leaving scars.

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

In strong democracies, elections take place when distrust of government is growing, voters are deeply divided, and there is deep and persistent 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 their foreign currencies into rubles was likely made with a eye on support the ruble and falling prices in the run-up to the Russian presidential elections in March.

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

A string of election victories that bring angry populists to power could push governments toward tighter controls on trade, foreign investment and immigration. Such policies, said Diane Coyleprofessor of public policy at the University of Cambridge, could tip the global economy into “a very different world from the one we are used to”.

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

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

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

Next year, the biggest election will take place in India. Currently the world’s fastest-growing economy, it is struggling to compete with China as a global manufacturing hub. Taiwan’s presidential election in January could potentially increase tensions between the United States and China. In Mexico, the vote will affect the government’s approach to energy and foreign investment. And a new Indonesian president could change its policies regarding key minerals like nickel.

The US presidential election will of course be by far the most important for the global economy. The approaching competition is already affecting decision-making. Last week, Washington and Brussels agreed suspend prices on European steel and aluminum and on American whiskey and motorcycles until after the elections.

The deal allows President Biden to appear to be taking a tough stance on trade deals as he fights for votes. Former President Donald J. Trump, the likely Republican nominee, advocated protectionist trade policies and proposed adopting protectionist trade policies. 10 percent tariff on all goods entering the United States – a combative measure that would inevitably lead other countries to retaliate.

Mr. Trump, who echoes authoritarian leaders, also indicated he would withdraw from the U.S. partnership with Europe, withdraw support for Ukraine and take a more confrontational stance toward China.

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

The global economic outlook for next year is mixed so far. Growth remains slow in most parts of the world and dozens of developing countries are at risk of defaulting on their sovereign debts. On the positive side of the ledger, rapidly falling inflation is prompting central bankers to cut interest rates or at least halt their rise. Lower borrowing costs generally stimulate investment and home buying.

As the world continues to divide into uneasy alliances and rival blocs, security concerns are likely to weigh even more heavily on economic decisions than they have until now.

China, India and Turkey have stepped up purchases of Russian oil, gas and coal after Europe sharply reduced purchases following Moscow’s invasion of Ukraine. At the same time, tensions between China and the United States have prompted Washington to respond to years of strong industrial support from Beijing by offering huge incentives for electric vehicles, semiconductors and other items 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.

The past two months have seen an increase in the number of smaller players like Yemen, Hamas, Azerbaijan and Venezuela seeking to change the status quo, said Courtney Rickert McCaffreygeopolitical analyst at EY-Parthenon and author of the recent report.

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

Houthi assaults on shipping from around the world in the Bab-el-Mandeb Strait – the aptly named Gate of Mourning – at the southern end of the Red Sea have driven up freight rates, insurance and prices oil while diverting maritime traffic at a much higher level. longer and more expensive route around Africa.

Last week, the United States announced it would expand its military coalition to ensure the security of ships transiting this trade route, through which 12 percent of world trade pass. This is the largest diversion of global trade since Russia’s invasion of Ukraine in February 2022.

Claus Vissen, chief eurozone economist at Pantheon Macronomics, 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,” Mr. Vistesen said, while acknowledging that the Red Sea assaults were “the flashpoint most obvious in the short term.

Uncertainty, however, has a moderating effect on the economy. Companies tend to take a wait-and-see attitude when it comes to investing, expanding and hiring.

“The continued volatility in geopolitical and geoeconomic relationships between major economies is the greatest concern of public and private sector risk managers,” a mid-year study said. investigation found by the World Economic Forum.

With continued military conflicts, increasingly frequent bouts of extreme weather, and a series of major elections coming up, it is likely that 2024 will bring more of the same.