Political outcomes aren’t likely to impact the economy all that much

The war in Gaza is today’s leading political fault-line. The brutality of the Hamas-led attack of 7 October now pales into insignificance compared to the genocidal Israeli response. With over 21,000 persons already dead, half of them children, and 50,000 injured, the unspeakable human tragedy in Gaza continues relentlessly. With virtually no sanitation and supplies of food, water and fuel reduced to a trickle by the Israeli blockade, starvation and disease could eventually kill more people than the bombing.

But geopolitics is a remarkably cynical space. The US could pull the plug and stop the war in no time, but it won’t. Despite civil society protests around the world, no government will intervene to stop the war unless its vital interests are affected. Even Iran is holding back, its goal of upending the Abraham Accords before Saudi Arabia signed on having already been achieved, at least for now. But there is a grave risk that the involvement of Iran’s allies, especially the disruption of Red Sea flows of oil and other commodities, could lead to a widening conflict with significant global economic consequences. In particular, the prices of oil and gas could spike and the world could be hit by another hydrocarbon price shock.

The second major fault-line is the war in Ukraine and the Nato-Russia confrontation. Markets have long factored in supply disruptions experienced during the first year of this war. Hostilities have since ground to a stalemate. There is increasing fatigue with aid to Ukraine both in Europe and the US. The Kremlin has indicated its willingness to consider a ceasefire on terms favourable to itself. Ukraine’s leader Zelensky could also be persuaded to cut his losses by accepting such a ceasefire. Its longer-term impact on the Nato-Russia confrontation remains unclear. But the economic outcome is less uncertain. If the war ended and sanctions against Russia were lifted, there would be some re-direction of oil and other commodity flows, growth could recover in Russia, and Ukraine would be launched on a path to restoration and recovery. The net impact on global growth and inflation would be beneficial but modest.

The third major fault-line is the US-China rivalry for global hegemony. The wide-ranging Deng-era reforms led to China’s unprecedented double-digit growth for over two decades, making it the world’s second largest economy. Hubris set in as it increasingly appeared that China would overtake the US economy. The quiet rise of China under Deng Xiaoping gave way to a pugnacious approach to foreign policy, trade and technology under Xi Jinping. But after the covid shock, China’s growth has declined dramatically. Its 5.4% projected growth for 2023 is likely to decline to 4.6% in 2024 and further to about 3.5% over the medium term. It is no longer clear that China will overtake the US. Against this background, there is an evident softening of China’s aggressive stance in different fora, especially vis-à-vis the US. How this will play out will depend also on the US response. Meanwhile, slowing growth in China will continue to have a moderating effect on global growth.

In all three fault-lines discussed above, the US is the common factor. The US elections in 2024 could thus have a major impact on the global geopolitical outlook. If Donald Trump is allowed to run, opinion polls suggest he would win. On Gaza and the Middle East, Trump is even more pro-Israel and anti-Iran than Biden, so we will see more of the same. But on the Ukraine war and the Nato- Russia confrontation, Trump would not only withdraw support to Ukraine, but also get tough on the Nato allies, whom he considers free-riders, while easing tensions with Russia. On China and protectionism in general, there is a continuity of policies between the Trump and Biden administrations, which is likely to be sustained. With or without Trump, the prevailing political fault-lines are unlikely to have a major impact on the global economic outlook, unless there is a widening and major escalation of the Gaza war. However, none of the parties concerned is seeking to move in that direction. So, a Middle East crisis driven oil shock is a possibility but not a very high probability.

Trump also differs strongly with Biden on climate change. He is likely to withdraw from the annual CoP meetings. However, this may not matter too much. There has been little progress in CoP meetings. Meanwhile, private investment has finally recognized huge opportunities in climate mitigation and it is gathering momentum. The private sector will increasingly drive the war against climate change in pursuit of profits. Much the same can be said about AI-based innovations, again mostly driven by the private sector. Governments can at best hope to regulate these innovations to minimize the risk of malign impacts and loss of jobs. Thus, global economic trends in 2024 and beyond are likely to be driven by technological innovations on climate change and AI, rather than by the prevailing geopolitical uncertainties.

These are the author’s personal views