The Bible's Book of Revelation -- the original Armageddon text -- identifies the Four Horsemen of the Apocalypse. While interpretations have varied through time, today they might personify – disease (Covid-19), famine (extreme weather induced food, water and energy shortages), war (Ukraine and now Gaza), and social and political disorder (everywhere). Hindu tracts believe that this is Kali-yuga, the fourth and worst of the four world ages, full of conflict, suffering and cataclysms. The prophecies may be right.
Alongside human suffering, depressing developments pose risks for a weak global economy.
The latest IMF Report forecasts slowing growth -- from 3.5 percent in 2022 to 3 percent in 2023 and 2.9 percent in 2024 -- below the 2000-2019 historical average of 3.8 percent. The slowdown is greatest in advanced economies and expected to decrease from 2.6 percent to 1.4 percent in 2024. Emerging market and developing economies' growth is expected to decline slightly in comparison -- from 4.1 percent to 4 percent. The underlying reasons include a weak recovery from the pandemic, exhaustion of savings, China's property issues, unsustainable global debt, banking problems, inequality, de-globalisation and political paralysis.
Even if localised, the Gaza conflict, with overlays of religion, ethnicity, territorial claims, genocide and mismatches in weaponry, will exacerbate existing stresses. Asymmetric warfare, such as 'lone wolf' or 'sleeper cell' attacks, may extend this conflict globally with consequences as 9/11 highlights. If it expands into a regional and great power military confrontation, which cannot be discounted, then the effects will multiply manifold.
Once wars begin, as history of the first and second World Wars demonstrate, no one is master of anything but everyone is slave to unforeseeable and uncontrollable events. While the exact sequence is unknowable, several underlying forces will be prominent. Political impacts will shape the financial implications.
As with Ukraine, the Gaza conflict will divide the world as countries take sides. This reflects historical allegiances but often erroneous readings of national interest and a desire to maximise domestic electoral advantage. Such events expose deep-seated hypocrisy and double standards, over issues like supply of armaments, war crimes and humanitarian concerns, heightening divisions.
America may find itself weakened. Its unequivocal support for Israel undermines its ability to play a role in the Arab Middle East. Qatar, UAE, Saudi Arabia, Jordan and Egypt, which have sought to defuse tensions in the region, will find it difficult to engage with a United States which at the first provocation immediately and unthinkingly reverts to partisan positions irrespective of wider implications. Middle East rulers also remain wary of the existential threat to their regimes from American encouraged colour revolutions and the ill-fated Arab spring.
The shift of resources to Israel, potentially abandoning Ukraine, raises questions about the USA's capabilities. Countries reliant on American military protection (Europe, Japan, South Korea, Taiwan, Australia and the Gulf states) as well as competitors (China and Russia) will have taken note.
Potential backtracking on the agreed release of $6 billion of Iranian funds held by South Korea despite no definitive proof of the Islamic Republic's complicity questions American willingness to honour its bargains. The conflict, amplified by opinionated news sources and social media distortions, highlights America's political and social splits. Unstable leadership, and dysfunctional legislative processes and foreign policy inconsistency undermines US credibility with allies and enemies alike.
These political factors will shape the economics through several channels, primarily the disruption of trade and commerce which requires relative geo-political stability to thrive.
First, trade, already slowing, may weaken further. Conscious of avoiding critical strategic dependence, countries will aim for greater self-sufficiency or new arrangements with like-minded fellow travellers. Sanctions, such as those placed by the US on China for dual use (civilian and military) or advanced technologies, will accelerate the process. Lengthy supply chains will have to be reworked – a long, thankless, expensive and perhaps impossible task. Emerging markets, reliant on trade, may find themselves in difficulty.
Second, inflationary pressures may return. With recent improvements driven mainly by lower energy prices, the Gaza conflict combined with ongoing restrictions on Russia has the potential to drive energy costs higher. In the worst case, a circa-1974 oil embargo or blockades of the Straits of Hormuz and the Suez Canal would change price dynamics dramatically.
Other commodity prices -- war consumes a lot of oil and metal -- combined with demand for energy transition required raw materials may create separate pressures. Labour costs will increase as manpower is diverted to the war effort. Movement of talent, especially in science and technology needed in defence industries, will slow, creating skills shortages. Alongside the drive to deglobalize, this will all add to inflation.
Price rises and resultant higher interest rates threaten a financial crisis. Over-committed debtors face refinancing and repayment difficulties. Asset prices must adjust to higher costs of capital. Emerging markets face a toxic combination of higher energy prices, higher US interest rates and a stronger dollar.
Third, public finances may deteriorate. The post-1989 economy reaped the benefits of a 'peace dividend' as defence spending declined from around 5.5 percent of Gross Domestic Product ("GDP") in 1989 to 2.6 percent of GDP in 2000. This will now reverse undermining more productive sectors of the economy. With government revenues stagnant, countries will move further into deficit and debt.
Fourth, the dollar's role as the dominant currency for trade and investment of reserve assets will be affected. Sanctions, exclusion from payment mechanisms and seizure of assets mean a search for alternatives. While the dollar's demise is not imminent, attempts by countries to establish new trading arrangements, denominate trade in their own currency, establish alternative funds transfer systems and rebalance reserves away from the dollar will accelerate. The likely fragmentation of global capital flows will affect debtor countries like the US which need to finance a significant portion of its budget and trade deficit (around 8 percent of GDP combined) externally.
Finally, the breakdown in international co-operation, already poor, will prevent progress on climate, resource scarcity and illegal immigration, likely to increase due to recent events in the Middle East. Global bodies like the United Nations or G-pick a number, will lose influence as alternatives such as the BRIC+ compete for hegemony.
Even Nostradamus, whose political and policymaking skills are not recorded, would find such environments difficult to navigate. Leon Trotsky was right when he apocryphally argued that "you may not be interested in war but war is interested in you".
Satyajit Das is a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022). His columns have appeared in the Financial Times, Bloomberg,WSJ Marketwatch, The Guardian, The Independent,Nikkei Asia and other publications.
© 2023 Satyajit Das. All Rights Reserved