Red Sea Shipping Halt Is Latest Risk to Global Economy

Red Sea Shipping Halt Is Latest Risk to Global Economy

Attacks by a determined group of militants in Yemen on vital shipping in the Red Sea Strait – a side effect of the Israeli-Hamasian war in Gaza – are adding a new dose of instability to a global economy already grappling with rising 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, that have had a devastating impact on the global economy, derailing it and leaving scars .

As if that were not enough, we are in for more volatility in the form of a wave of national elections, the impact of which could be profound and long-lasting. More than two billion people in about 50 countries, including India, Indonesia, Mexico, South Africa, the United States and the 27 nations of the European Parliament, will take part in the elections. Overall, the participants in the 2024 Electoral Olympics account for 60 percent of global economic output.

In robust democracies, elections are taking place amid rising distrust of government, deeply divided voters, and deep and persistent concerns about the economic outlook.

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

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

A spate of election victories that brings angry populists to power could force governments to tighten controls on trade, foreign investment and immigration. Such policies, said Diane Coyle, a professor of public policy at the University of Cambridge, could take the global economy into “a very different world than the one we are used to.”

In many places, skepticism about globalization is fueled by stagnating incomes, falling living standards and growing inequality. Still, Ms. Coyle said, “A world of shrinking trade is a world of shrinking revenue.”

And that raises the possibility of a “vicious circle” as the election of right-wing nationalists is likely to further weaken global growth and weigh on the economy, she warned.

Many economists have compared recent economic events to those of the 1970s, but Ms Coyle said the decade that came to mind was the 1930s, when political upheaval and financial imbalances “led to populism, declining trade and then more extreme conducted politics”.

Next year’s biggest election will take place in India. Currently, the country is the world’s fastest-growing economy and is struggling to compete with China as a global manufacturing hub. Taiwan’s presidential election in January could increase tensions between the US and China. In Mexico, the vote will impact the government’s approach to energy and foreign investment. And a new president in Indonesia could change policy on critical minerals like nickel.

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

The agreement allows President Biden to take a tough stance on trade deals in the fight for votes. Former President Donald J. Trump, the likely Republican nominee, has championed protectionist trade policies and proposed imposing a 10 percent tariff on all goods imported into the United States – a combative move that inevitably invited other countries to retaliate would cause.

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

“The election outcome could lead to sweeping changes on 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 the coming year has so far been mixed. Growth remains slow in most parts of the world and dozens of developing countries are at risk of defaulting on their public debt. On the positive side, the rapid decline in inflation is prompting central bankers to cut interest rates or at least halt their rise. Reduced borrowing costs are generally an incentive to invest and purchase a home.

As the world continues to fracture into uneasy alliances and rival blocs, security concerns are likely to play an even greater role in economic decisions than before.

China, India and Turkey stepped up purchases of 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 prompted Washington to respond to years of strong industrial support from Beijing by offering huge incentives for electric vehicles, semiconductors and other goods considered essential to national security.

The drone and missile attacks by the Iran-backed Houthi militias in the Red Sea are another sign of increasing fragmentation.

In recent months, there has been a rise in smaller players such as Yemen, Hamas, Azerbaijan and Venezuela seeking to change the status quo, said Courtney Rickert McCaffrey, geopolitical analyst at EY-Parthenon and author of the recent study report.

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

Houthi attacks on ships from around the world in the Bab-el-Mandeb Strait – the aptly named Gate of Sorrow – at the southern end of the Red Sea have driven up freight, insurance and oil prices while severely diverting maritime traffic longer and more expensive route around Africa.

Last week, the United States said it would expand a military coalition to ensure the safety of ships passing through the trade route, which carries 12 percent of global trade. It is the largest rerouting 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 been limited so far. “From an economic perspective, we do not see a huge increase in oil and gas prices,” Mr. Vistesen said, although he acknowledged that the Red Sea attacks were “the most obvious short-term flashpoint.”

However, the uncertainty is having a dampening effect on the economy. Companies tend to take a wait-and-see approach when it comes to investing, expanding and hiring.

“Ongoing volatility in the geopolitical and geoeconomic relationships between major economies is the top concern for risk managers in both the public and private sectors,” a World Economic Forum mid-year survey found.

With ongoing military conflicts, increasing weather extremes and a number of important elections, it is likely that 2024 will bring more of the same.

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2023-12-24 22:12:55