What are the potential longer-run geopolitical considerations?
We have written many times in the past about how the “Turbulent Twenties” was going to see a further development away from the US-centric world that we have lived in since the Second World War. The future, as we saw it, was a “multi-polar” world, with the US and China rivalling each other, hopefully peacefully, for global hegemony. In addition, Russia, Turkey, Iran and other countries that had adopted varying anti-American stances in the last decade could collaborate to ensure they were not locked out of the global economy by American interests and the threat of being barred access from the dollar-based financial system.
At the same time, we believed that regional issues would come to the fore in an era where global geopolitical tensions were high, and that the South China Sea, the Eastern Mediterranean, Eastern Europe and the Sahel provided potential flashpoints to cause the world discomfort and a time of deglobalisation. These concerns are obviously being realised, and we continue to question why there was a combination of the most relaxed attitudes possibly ever demonstrated by investors amidst the clear trend for global disharmony.
What effect will the crisis in Ukraine have upon the global economy?
Before the start of the war in Ukraine, the global economy was growing well, as recent data points have demonstrated. Two weeks ago, we found out that the latest US employment data and European business confidence surveys (admittedly conducted before the outbreak of hostilities in the Ukraine) were strong and hinted that our view of solid growth in the first half of 2022 looked accurate. In addition, we learned last weekend that the Chinese government has set an aggressive growth target for the year ahead, implying that economic assistance will be provided both in the form of fiscal and monetary stimulus. As we have intimated before, the early economic trends of 2022 were not likely to be an issue for investors, as the world finally recovered from the “COVID Crisis” and pent-up demand fuelled an economic recovery. This remains our base case for the months ahead, even if risks to this view have increased.
The major problems that we cited late last year were inflation and investor complacency. There is no doubt about it, the crisis in Ukraine has heightened the concerns over inflation. Politicians and central banks will try to share much of the blame for the deleterious effects of rising prices on Putin, but this is an issue that began eighteen months ago, even if rising oil and food prices have been accelerated by recent developments. Inflation will ultimately become a suppressing factor on economic growth, as consumers and companies are forced to spend their money on “staples” as opposed to “discretionary” items, with a greater shares of people’s money being spent on basic foodstuffs and petrol. This remains the biggest issue for the global economy.
So far, there has been a disconnect between the stated aims of central bankers and the pricing of interest rates in financial markets; the former say they are “staying the course” and rates are going up to combat obvious inflation issues, whilst markets say that they will be unable to do so, as economic activity wanes due to heightened global tensions over Ukraine. This could be a classic “Hobson’s Choice”: either rates go up and weigh upon economic growth, or they can’t go up and inflation could become “unanchored”, leading to greater issues later this decade. Somewhere in between is the most likely outcome, with a more gradual approach to interest rate rises now likely due to the problems in Ukraine. In simple terms, our concern over “inflation uncertainty” has risen and the chance of inflation gliding lower quickly has reduced.
