Disruption of shipping in the Red Sea is the latest risk for the global economy

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

The risk of an escalation of the 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 landed like bear claws on the global economy, throwing it off course and leaving scars.

As if that weren’t enough, more volatility is coming in the form of a national election wave the repercussions of which could be profound and lasting. More than two billion people in approximately 50 countries, including India, Indonesia, Mexico, South Africa, the United States and the 27 nations of the European Parliament, will go to the polls. In total, participants in the 2024 elections represent 60 percent of global economic output.

In strong democracies, elections are held at a time when distrust in the government is rising, voters are deeply divided, and there is deep and ongoing anxiety about the 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 this fall to require exporters to convert foreign currency into rubles was likely made with a eye on shoring the ruble and reduce prices in the run-up to Russia’s presidential elections in March.

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

A series of electoral victories that bring angry populists to power could push governments to exercise tighter control over trade, foreign investment and immigration. Such policies, he said Diana Coyleprofessor of public policy at the University of Cambridge, could take the global economy into “a very different world to the one we are used to.”

In many places, skepticism about globalization has been fueled by stagnating incomes, falling living standards and growing inequality. However, Ms Coyle said, “a world in which trade contracts is a world in which incomes decline”.

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

Many economists have compared recent economic events to those of the 1970s, but the decade Coyle said came to mind was the 1930s, when political upheavals and financial imbalances “led to populism and the decline of the economy.” commerce and then to extreme politics.”

Next year’s most important elections will be held in India. It is currently the world’s fastest growing economy and is racing to compete with China as the world’s manufacturing hub. Taiwan’s presidential election in January has the potential to 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 president in Indonesia could change policies on critical minerals like nickel.

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

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

Trump, echoing authoritarian leaders, has also indicated he would step back from the United States’ partnership with Europe, withdraw support for Ukraine and take a more confrontational stance toward China.

“The election outcome could lead to far-reaching changes on 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 in most corners of the world remains sluggish and dozens of developing countries are at risk of defaulting on their sovereign debts. On the positive side of the scale, the rapid decline in inflation is pushing central bankers to reduce interest rates or at least stop their rise. Reduced borrowing costs are generally a stimulus to investment and home purchasing.

As the world continues to fracture into uneasy alliances and rival blocs, security concerns are likely to take on even greater weight in economic decisions than hitherto.

China, India and Turkey rushed 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 prompted Washington to respond to years of strong industrial support from Beijing by providing huge incentives for electric vehicles, semiconductors and other items considered essential to national security.

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

In recent months, there has been a rise in smaller actors such as Yemen, Hamas, Azerbaijan and Venezuela seeking to change the status quo, he said. Courtney Rickert McCaffreyEY-Parthenon geopolitical analyst 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 more dispersed” and that increases volatility.

Houthi attacks on ships around the world in the Strait of Bab-el-Mandeb (the aptly named Gate of Mourning) at the southern end of the Red Sea have driven up shipping and insurance rates and oil prices, while diverting maritime traffic at a much greater rate. 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 passing through this trade route, through which 12 percent of world trade happens. This is the largest diversion of global trade since the Russian invasion of Ukraine in February 2022.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the impact of the attacks had been limited so far. “From an economic perspective, we are not seeing a big increase in oil and gas prices,” Vistesen said, although he acknowledged that the attacks in the Red Sea were the “most obvious short-term flash point.”

However, uncertainty has a chilling effect on the economy. Companies tend to take a wait-and-see attitude when it comes to investments, expansions and hiring.

“Continued volatility in geopolitical and geoeconomic relationships between major economies is the biggest concern for risk managers in both the public and private sectors,” a mid-year report. survey according to the World Economic Forum.

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